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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: hueyone who wrote (163)	8/2/2002 3:58:08 PM
From: G_Barr	Read Replies (1) \| Respond to of 786

Here is a possible method for expensing stock options that involves a combination of both the Black Scholes estimates and the value as determined by the difference between strike price and market price at time of exercise. I'm not sure there aren't problems with any "true-up" or "back-end" expensing. Take an example of two small tech companies with stock at $1. Company A lures some superstar engineers with 5 million options (with 4 year vesting) while company B lures some superstars with a 5 million share stock grant (restricted from transfer for 4 years). Let's say both sets of stars generate new products that result in their company having $500 million in annual pro forma earnings and $100 stock price at the end of 4 years. Under a "true up" method Company A has a $5 billion expense and no gaap earnings and Company B has a $5 million expense and $499 million in gaap earnings. This makes no sense when the substance of the company's compensation and earnings are the same and granting options, rather than stock, should be better for a company since a stock grants always produces dilution while options don't necessarily (and options result in some cash payment from the employees). In both cases the company has lost the ability to sell $5 million shares to 3rd parties and hence has a real cost. However, on day one, they lost the ability to collect $5 million, at year 4, they lost the ability to collect $5 billion and, at year 10, perhaps the ability to collect $20 billion. On the other hand, I wonder if they really lost the ability to collect $5 billion when, at least in my examples, there would not have been a $100 share price without the equity awards. Thus, it seems to me that expensing up front makes more sense for you don't get into a situation where the more value the equity awards create the more they cost the company. I would think such would also artificially cap the stock price without relationship to any business fundamentals as why would a stock go up when for each dollar it went up, the earnings would decrease. I don't think there are easy answers here.