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

To: Bilow who wrote (83051)	8/17/2000 5:23:12 AM
From: Don Lloyd	Read Replies (3) \| Respond to of 132070

Carl - [...Options are a cost of doing business. They are an expense. They belong on the expense line, not hidden somewhere in the balance sheet. They are a cost. The one thing that the Austrian economists will stress over and over is that there is no free lunch. Making money costs money (expense). Making a complex transaction (like an option grant) to hide the expense doesn't make it go away. There is still an expense. Expenses belong on the Income/Outgo sheets, not the balance sheet....] Now that you have started using Austrian Economics to support your arguments, you're going to have to use ALL of it. -g- All of your arguments seem to fail on a lack of awareness of the Subjective Theory of Value, the base of Austrian Economics as developed in the 1871 book 'Principles of Economics', by Carl Menger. When an option on the listed exchange market, trades at a particular price, it does not mean that the buyer and the seller have agreed on a value of the option, but rather that they violently disagree. The buyer believes that the option is worth more than any possible alternative use of the expended funds, and the seller values the received funds more than any other use of the option disgorged and does not foresee that waiting for a possible future trade will lead to a better price, after discounting his time preference for present vs future funds. There is no such thing as an intrinsic value for any economic good. All values are subjective, reflecting both arbitrary preferences and objective differences of contextual environment as well. Also of prime importance, is the Economic Law Of Diminishing Marginal Utility. As you acquire more and more of an economic good, each successive unit satisfies less and less urgent needs. This means that the value of the first unit of the good is greater than the value of the last unit of the good. Pretending that any particular value can be universally assigned to a unit of a good is madness. Before 1871, economists had no way to explain the relative valuations of a cup of water and a one carat diamond. It was previously thought that the valuations were related to overall scarcity, with water being far less scarce than diamonds. Of course, a man dying of thirst, will tend to willingly exchange a diamond for a first cup of water, but successive cups will eventually decline in value until they are hardly economic goods at all. Values are connected to the marginal unit. All voluntary exchanges are made because each party orders the subjective values of the exchanged goods in reverse order. The cost of an exchange for one party is the opportunity cost of the good delivered (the next best use of the good given up, precluded by the fact of the exchange). This cost has no connection whatsoever to the value that other party may assign to the received good. If I sell you a moderately rare penny to complete your collection for a stiff price, the cost to me is merely a penny unless I want to go into the coin dealer business and find another buyer who would still likely pay less than you for a still incomplete collection. The high subjective value to you is entirely disconnected from the cost to me. Regards, Don

To: Bilow who wrote (83051)	8/17/2000 9:08:15 AM
From: sjemmeri	Respond to of 132070

>So my conclusion is that paying employees with options is a good idea only for companies that are growing at extremely high rates and/or that have an extremely high market cap, compared to their labor costs. As others have stated, whether compensating (I like that better than paying) with options is a good idea is an entirely different question than whether to view them as an expense or dilution. There is no doubt that there are abuses and bad business decisions in the marketplace. Also, as an investor, one would be prudent to not assume that employees will be satisfied with option compensation forever and to consider that they might want cash in the future.

To: Bilow who wrote (83051)	8/17/2000 3:35:06 PM
From: Skeeter Bug	Read Replies (1) \| Respond to of 132070

bilow, to add to your thoughts... there is a delay in the reporting of option dilution. sometimes this is a year, sometimes 5 years. until the options vest, NO DILUTION is recorded. short term thinkers running companies (are there any other kind? -ng-) will often find this reporting delay too much incentive to goose the numbers NOW. >>The value of options given to employees must be included as a business expense because it is something the business must do in order to get the employee to kiss his boss' butts (which seems to me to be the primary use of employees, but that is another story completely). << a very ugly story, too... -ng-