Chuz, thanks for the explanation. I have more questions however.
Re: 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.
From what I understand, Dell issues options to top performing employees (regardless of level but you generally must be
salaried.. not hourly) at certain times of the year (the biggest chunk occurs in Q2 and is distributed to ~20% of the entire workforce). The strike price is the average selling price (or
price paid by Dell) during a purchase period. Example, a
friend of mine who works there just received a 1200 share option
grant with a strike price of $82/shr vesting over a 5 year period. When it was granted, the stock was trading in the $80s. Most all grants vest over a 5 year period which would prevent immediate
sale.
Based on this, your example becomes a wash. Let's assume the employee could sell immediately (which he cant in Dell's case)
but the options are granted at the market price of $100/shr. The
cap value of the company increases to 10.1B, shrs OS increases to 101M, the value of existing shares stands pat @ $100.
So what I'm confused on is why would a company purchase shares
for $100 and immediately grant them at $10? The employee would
already be way in the money where the option becomes more like
a gift. One of the goals is to have the employee participate in future appreciation through hard work etc. etc.
So two assumptions need to be tailored in Dells case.
1. Options are granted with a strike price near market
2. Options can not be immediately sold
Maybe executive management does engage in numerous gift options
to themselves. It's not that way for the bulk of the workforce however. Maybe we should study the proxy to see if we can
figure out if the majority of options held by executives are
being granted with artificially low strike prices.
You also stated that options are generally reserved for the top
brass. While this is true from a weighting standpoint (the
bulk of the riches are funneled here), all employees who
have been with Dell for 5 years or more hold one or more
options. From what I hear, most folks don't sell these things
because of the lessons they've learned from those who have
and have given up small fortunes. Dell issued across the board
options to all employees in 92 and 93 totalling 100 shares
with a strike of around $22/share (that's what it was trading
for at the time) with a 12mo vestation period. 4 splits later
the strike is ~$1.50 for 1600 shares with a market value of $185,000. Not bad for a $5/hour employee on the assembly line.
MEATHEAD |
