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Technology Stocks : All About Sun Microsystems

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To: QwikSand who wrote (51880)	9/26/2002 5:42:39 PM
From: Scott Meyer	Read Replies (2) of 64865

The expense to the company giving an option is the cost of the stock necessary to back it up, possibly with the addition of interest on the capital thereby tied up. So if XYZ is trading at $10 and they grant Joe Hotshot 1000 options (at $10) they must either have 1000 shares of XYZ to cover the option or they must go buy them at the market price. They pay $10,000 to buy the stock and that $10,000 shows up (should show up) as (gasp!) salary expense. No different than giving Joe Hotshot $10,000 and letting him buy shares except that tax consequences (to Joe) are deferred until the options are exercised. I think that all the nonsense about Black-Scholes valuation is a red herring put forward by people who would rather not deal with option expenses consistently. As an investor, I don't give a rip about the hypothetical future value of someone's options. What I do care about is cash flow and dilution. I think that it should be illegal for companies to just issue more stock to cover options grants but I don't see any way of preventing a startup from retaining a large block of shares to satisfy future options grants at very low cost. At least that would show up in the shares outstanding/float.

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