Employee Stock Options - NQSOs & ISOs Message Board

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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs

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To: rkral who wrote (68)	6/17/2002 10:48:29 AM
From: Stock Farmer	Read Replies (2) of 786

Ron, It is far more subtle than you suggest. When an option is exercised there is an actual transfer of assets: a share is created and cash changes hands. This is actual, factual transfer of title. Nobody can claim otherwise. And we know precisely what it costs everybody and what everybody else gains. I call this the "ACTUAL" value. When an option is granted, this future potential economic activity is created. But it does not occur. We could say that value changes hands if we'd like. But what really does change hands? A promise. A piece of paper called an "Instrument of Grant" which details how a future transaction involving transfer of capital might take place. The real value follows later. Is it the conditional promise itself that has value? Or the value that follows later that has value? Think this through very very carefully. Particularly for stock options, which are non-assignable, non transferrable... the only way anybody will get money out of these things is by exercise. So you see that it is fair to claim that there is not any actual economic value transferred on grant. HOWEVER, this doesn't stop us from declaring the option to "have value" and to assign a fair price!!! Because we can legitimately expect that exercise will occur in the future. And we can assign value in the present equal to what we expect the value to be in the future. Indeed, a fair present value wouldn't be any more or any less than what we expect. It would be precisely equal to the estimated future potential economic value discounted to present. Furthermore, if our future forecasting ability was PERFECT, then would there be any difference between the "Actual value" at exercise and the "fair value" at grant? So where you claim that there are two values, indeed there is but one value!!! Measured as it is from two different perspectives, one of which is perfectly accurate but retrospective, and one of which is prospective but prone to error. An entire line of thought flows quite logicly from this realization. But most people fail to get here. John

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