Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Mama Bear who wrote (83005)	8/16/2000 1:54:00 AM
From: Bilow	Read Replies (1) \| Respond to of 132070

Hi Mama Bear; The part you missed... What actually happened is that it turns out that Nathan didn't know the end of his alimentary canal from a hole in the ground and provided totally mediocre management. His option to buy 50% of the company at a fair price wouldn't have been worth anything, except that 15% inflation (or Greenspan pumping up the money supply by 15% per year with consequent effect on the value of hot dog stands) turned it into an option to buy 50% of a $200,000 company for $50,000. Naturally, he executed his option, and you ended up selling him half the company for 1/4 of its value. The story gets even worse when you meet Nathan II who is an expert in creative accounting... -- Carl

To: Mama Bear who wrote (83005)	8/16/2000 2:58:43 AM
From: Don Lloyd	Read Replies (1) \| Respond to of 132070

Barb - [...hot dog stand...] I want to offer you an option to buy a half interest in my franchise to publish serious, but off the wall, economic analogies on this thread. -g- From Barrons - "...'That old straight arrow Warren Buffett, who is one of the world's last value investors, is also one of the world's last critics of stock options. The true cost of compensation should be "brought out of the closet" and shown to shareholders at the time options are granted, he says. "In effect, accounting principles offer management a choice: Pay employees in one form and count the cost, or pay them in another form and ignore the cost," Buffett wrote in his letter to shareholders last year. "If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, where in the world should they go?"..." Your analogy helps provide the answers to WB, options are an offer of ownership/partnership. Regards, Don

To: Mama Bear who wrote (83005)	8/16/2000 9:09:47 AM
From: Freedom Fighter	Respond to of 132070

Mama Bear I "think" there's one small flaw. You are assuming that the kid has to come with 50K for his half interest in your 100K business. OK so far. In most cases, a corporation retains and invests a substantial portion of its earnings during the vesting period. That's what leads to the growth. If during the vesting period a company would pay out its entire earnings stream in dividends (to you in this case), more than likely, the stock and the business value would remain flat. So at the end he would be buying half interest of a 100K business for 50K. That's fair. Essentially his option was worthless because he didn't receive the benefit of retained earnings and the growth in value associated with that. He could have made the same deal at the start. However, in the real world, companies do retain eanings and grow. So ultimately he might be buying 1/2 of a 200K for 50K. A great deal. You gave up 1/2 of all the increase in value associated with the retained earnings. As far as your other point, if he's a genius and turns it into a 400K business, then you made a great business decision in hiring him. But that's unrelated to the real earnings. (you were probably underpaying him) I'm still tossing this around. Wayne