Hi Peter, Ok, so we have identified at least one hot spot. Whether or not the market price of a company is a fair price.
Good enough. Let's skip that and come back to it. We will have to make any determination of "cost" independent of market price.
Let's be very careful to use only things we can count on, and nothing to do with market price. Then let's try to work out this "percent dilution", shall we? And I will not be careless with my terms.
Start from where you and I agree and focus the debate.
When stock options are exercised, there is a benefit to the employee in the amount of n * (P-S) where P is some market price that may or may not be fair and S is the striking price of the option. My silly Shannon computation assumes that this is the price that shareholders actually bear. Which is in doubt.
Instead, there is merely dilution.
The moment before the options are exercised, individual shares have a value (not price) which is the expected present value of its future assets (A) divided by the number of shares outstanding (N).
In the instant after the options are exercised, we now have n+N shares. And in return for exercising the shares, employees gave us n*S in cash, so assets increased by n*S.
That makes the new "fair" price of a share (A + n*S)/(N+n) and the old "fair" price of a share A/N.
So if we take a look at the "cost of dilution" it would be the subtraction of these two fair prices. Which is to say Cost = A/N - (A+S*n)/(N+n), and in the limit where S is zero and/or n is small compared to N, we see a "percentage dilution here, by factor n / (N+n)
It's certainly not the Shannon Computation, but at least we could agree that this represents the way to compute the cost of dilution?
John |
