Chuz,
(hope I'm not too late to the party!)
re The effect of a stock option (forget handcuffs etc for the moment) is to dilute shareholder equity. Fore example (purely hypothetical), suppose we have a company with a capitalized value of $5BB, with 100MM shares o/s. Each share is selling for $50. Now suppose the company issues 1MM shares as part of an options deal, and charges employees $10. So now the value of the company has increased to 5.010BB with 101MM shares o/s. The value of each share has fallen to 5.010/101 = $49.604. To avoid dilution, the company would need to spend $49,604,000 for share repurchase. That is an expense to shareholders.
Does your example hold true when the company issues options priced at or above the current stock price? For example: suppose the equity is selling at $50 per share, the company buys a LEAP call option (strike 50) for $10, and issues an option to the employee to buy the stock at $60. It would seem to me that for the duration of the LEAP call, the corporation is risking only the premium paid for the LEAP, and the dilution to the general shares is zero, since the employee will be exercising the option at cost. Is this correct? If not, wherein do I err?
Further, if the option issued to the employee is for a longer term than the LEAP option purchased by the company, if the company exercises the call upon expiration to buy back shares, is not the net effect zero?
I would think that the ESO problem is most significant under the following scenarios:
a) the company issues options to buy at a lower price than the current stock price; or
b) the company 'reprices' options because the equity has fallen in market value.
(I always had maths on Monday and art appreciation on Tuesdays, so I may have made some glaring errors)
thanks, jbn3 |
