OT ... "Semantics are such simple things. There is no debt by the company in the strict sense of the company owes no money to the employee, pays no interest and records no liability on the asset sheet. Sure.
But promising someone to pay them money in the future is a debt. And stock options are many things, amongst which the promise of future money of indeterminate amount ranks fairly highly."
John,
Why don't you describe the company grant of an employee stock option as what-it-is? Don't try to sell this "debt" nonsense to us.
The option grant is the sale of a call option for a $0.000000 premium. (Or so it would appear. I will amend this later.) The company is the seller of the call option (call writer). The employee is the buyer.
The sale of the employee stock option does not result in a company debt. It results in the obligation to deliver partial ownership of the company to the employee, according to the terms of the option agreement.
The employee stock option is not a standard option to be sure. The employee's option cannot be sold on the open market. It may have a "vesting schedule" dictating that it cannot be exercised for some time. And the option usually doesn't expire until 10 years after the grant, well in excess of the longest LEAPS available on the open market. But the employee stock option is a call option nonetheless.
The value of the call option on the grant date is not $0.000000. The value can be determined using a variant of the Black-Scholes option model. A 3-year call option on one share of QCOM stock at $32, with an exercise price of $32, an interest rate of 5%, and an annual stock price volatility of 75% is $16.60 (using CBOE option calculator). Let's call it $16. The value of a 10-year option would be considerably higher. (The CBOE apparently "improved" their calculator so 3-years is now the max time.)
If a company grants a 1-share employee stock option (per the above), the employee receives a $16 compensation .. and the company receives a $16 option premium .. for a net cash flow of $0 (I know you're tired of seeing the $0.000000 by now. <g>)
The grant cost has already been addressed by an FASB statement .. which I'm too lazy to go look up right now. Unfortunately, the FASB gave a company the option (pun intended) of applying their guideline or not. However, some companies do include the grant cost in their pro-forma statements. You and I been here before.
Ron
P.S. QCOM, like many other companies, is a naked-call-writer since they do not buy their own company stock to "cover" the potential obligation of the call options they have written. I am intentionally not commenting on the cost of the exercise for now. |
