Hi Peter, my agenda is understanding.
And responses like this are reason enough to continue: "The $3,112 million in paid in capital represents the strike price of the option grant. That is what the company received for those shares, and what should appear on the balance sheet. The $7544 million represents the stock price appreciation from the time of grant to the time of exercise, this is not a cost to the company or shareholders. If the option strike price is a discount to market price at the time of grant, that difference dilutes shareholder value."
To summarize: employees get value. This value doesn't come from the company, and it doesn't come from shareholders.
Where, pray tell, do you think it does come from? There is no such thing as a free lunch.
As an exercise in perspective let's examine a company from an alternative point of view. As though it is owned by Joe Sixpack, a sole proprietor with bags and bags of money.
Our only constraint is that everyone else (employees, customers, suppliers and IRS) see the same economics as in the current situation where the company is owned by thousands of shareholders.
Or in other words, whatever economics apply to Joe Sixpack apply to the public shareholders. And vice versa.
So the first thing happens, Joe ticks off "vote whatever you want" on his proxy statement 'cause he'd rather not be bothered running the company. Like kids in a candy store, the unfettered executive and their buddies on the Board propose to allocate a hundred million stock options at a strike of $10 each. Given mostly to themselves and some to the rest of the employees.
Meanwhile, every day, Joe is watching the little graph that charts his net worth go up and up and up. He's got many many bank accounts opens some and closes some all the time. Into which deposits and withdrawals of money occur all the time too. Every day he takes some money out of his bank, buys a share from himself, and then later on he sells it back to himself, over and over again all day long. Millions of times per day, actually. At the close of the day he records the last price he paid himself for a share as "market value" of a share and multiplies the whole lot by that price to determine his net worth.
And glows in satisfaction. And hangs out on SI posting messages to himself. Whatever. One day when the graph shows $100 the insiders come to him and say "we're cashing in our stock options". And Joe obliges like he's obliged to do. He asks for their 1.0 Billion dollar contribution like it says in the instrument of grant. Then he books a 30% tax credit on the difference (2.7 Billion) and marks up the assets of the company by 3.7 Billion dollars in total. He warms up the photocopier and cranks out a hundred million new certificates and hands them over.
And then to maintain his 100% ownership, he immediately buys them back. And he forks over 10 Billion real dollars to them and gets the hundred million certificates back.
Now let's see where things are standing at this point.
Joe Sixpack still owns 100% of the company, which has appreciated in asset value by 3.7 Billion dollars and share count by 100 Million. All properly recorded on the books. It has *actually* gone up in value by this amount.
Employees own 10 Billion dollars and whatever tax liability goes with it. And photocopies of share certificates as souvenirs of how they became millionaires.
And Joe parted with 10 Billion in real cash. So when he adds up the actual economic activity, he's down by 6.3 Billions, although the little line on his chart says he's way way up. 'Cause he started as the owner back when it actually cost him a few bucks per share to buy them all up.
This is all too confusing to Joe, so he takes out a sixpack, pulls lose a can and pops the top. Dreaming of what he will do with his untold riches.
What Joe realizes only dimly is that those shares he owns aren't worth squat until he finds someone else to take them off his hands. What he also fails to intuitively understand is that the trading that goes on between him and his pockets doesn't change the economic value of the company one iota and isn't making him any money at all. Doesn't change the amount of money he's going to receive ten years down the road when he cashes in.
Oh sure, some of his bank accounts go up, but others go down by just as much. All he's really accomplishing here is transferring wealth.
And what he has to do if he really wants to make a real profit is to find someone else willing to buy something that takes $10 Billion in cash and convert it to 6.3 Billion in happy insiders and 3.7 Billion in assets.
Which might some day be harder to do than it looks. Unless of course it is also sitting on the patents to the tollgate to the future.
In which case Joe might just have a chance. Provided that the future comes before he runs out of money.
John |
