Rather obviously, existing shareholders are better off if the strike is $15. And yet the dilution is the same in both cases. In both cases, diluted shares outstanding increases from 100 shares to 200 shares. Existing shareholders get diluted down from 100% of Intel to 50% of Intel.
Not exactly.
You did not include in your example an EXERCISE price. Nor did you include a vesting period; the period the employee must hold the options before he can exercise. If for purposes of analysis, your strike 15s had a current fair market value of 15 then there would of course be no dilution of stock.
Nor is there a "dilution" in the stock if the option is underwater and never exercised, and current disclosure rules provide this.
If the exercise price equals the stike equals the price of the stock on the market, 15 Dollars more of stock is outstanding, and the company gets 15 dollars in cash; and, there is again, no dilution.
In order to properly value the benefit (consideration) paid to the company for the stock, to be issued, you need to contemplate the future value of the option ala some theory of Black-Shoales or some other waco theory, and of course you must subtract from any dilution, the added value of the employee contributing to the company, more than he otherwise would.
However, IN NO EVENT is the issuance an "expense" to the company, IT does not cost the company a dime. It may be a dilution to the shareholders, it may 'cost' the shareholders, but it does not cost the company a penny. In fact, it allows compensation of the employee SAVING PRECIOUS CASH!!!
That is why the law has provided for the last 70 years or so, that "proper adjustment shall be made to retained earnings", which is currently done.
If you both expense it on the books and count the dilution, you are double penalizing earnings per share.
It is a disclosure issue, not a cost to company issue.
Don't you agree? |
