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Technology Stocks : Dell Technologies Inc.

DELL 133.35

+0.1%

Nov 28 9:30 AM EST

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To: Meathead who wrote (52244)	7/19/1998 1:46:00 AM
From: Chuzzlewit	Read Replies (2) of 176387

Meathead, you asked :Chuz, can you walk us through the mechanics of a typical options grant and how the company might pay for it? Sure. The company doesn't pay for it. Stockholders do. Here's how it works. The company has a certain number of shares that have been authorized but unissued. When the option is exercised the company sell the new share to the employee at the strike price. The value of the company is increased by the cash the company receives from the employees on a dollar for dollar basis. But the value of each share of stock is diminished as the result of dilution. So here's what happens in the following hypothetical example (all numbers are made up -- do not attempt to extrapolate this to any particular company!) Suppose a company has 100 MM shares o/s and the market value per share is $100. So the capitalized value of the company is $10,000 MM. Now suppose the company is going to issue 1 million shares to employees at a strike price of $10. That will add $10 million to the value of the company (remember, it is receiving cash from the employee in return for a newly issued share of stock). So now the total value of the company will be $10,010 million. But the number of shares has risen to 101 million. That means that the value of existing shares has decreased to $99.11 each. To view it another way, existing shareholders forked over the other $90 per share, or $90 million out of their own pockets. You see, the accounting rules were generated to account for stock transactions as financing actions, so they were felt to be profitless. But the ascension of employee stock options as a back-door compensation plan took advantage of that system to hoodwink shareholders. This is why we now see earnings reported as diluted. But even here those numbers underestimate the impact because they do not include options that have been authorized but nor yet issued. That's why I urge you and every other shareholder to become informed on this issue and to vote no on these executive compensation plans. If enough shareholders bridled at these giveaways managements might begin to get the message. Hope this explanation helps. TTFN, CTC

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