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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: Steve Lee who wrote (98505)	8/22/2002 2:38:46 PM
From: Timothy Liu	Read Replies (2) \| Respond to of 99280

Let's take a look at the simpler picture I described in previous post: instead of giving employee options, give them stock straight up. You will agree this is more expensive than options, right? Giving stock to employee is the same as sell stock on market and give the money to employee. Do you agree? The employee can always buy back the stock from the market when he get the money. Sell stock on the market will incur a positive cash flow coming in. It is offset by negative cash flow going out to the employee. There is no change in company cash position, operation and fundamentals. The fallacy in your description is not realizing with stock offering, we are tying company financial to stock market. You agree stock market is not a zero sum game. By offering stock (or stock option) the company transfer some of the wealth from shareholder to the employee while the company remains as sound as it was. Shareholders may not make as much money (or may lose money) while employees make money. Stock option make sure that Shareholder must make money for employee to make money - a win-win scenario. 0.02$ Tim

To: Steve Lee who wrote (98505)	8/27/2002 5:24:07 PM
From: Casaubon	Read Replies (1) \| Respond to of 99280

If the company gives away shares at a discount (through options) and that discount is greater than the reported earnings then the company has actually made a loss. It is not accounted for by dilution. efficient market theory should lower the price of the stock to account for the "discount". In this scenario, the "discounted" options would probably end up being out of the money. Thus, the options would end up not being sold (because they are out of the money and worthless). Once the options are bought out (this only happens when the options are in the money), there is a dilution which reduces earnings per share. If the market doesn't price the shares reasonably then options will be bought, converted to stock, and the stock will then be sold at inflated prices. The shareholders are not getting hosed by the options grant. They are getting hosed because they rallied the stock price too high. In other words, they overpaid. The way the options can be fairly priced is to ask, "for how much money would the company be able to sell the options over the counter?" You see, the options only have that much value to the company. Just as if they had sold any other product. The value to the company, of any goods (in this case the options are the goods) or services, is what the market will bear. So, if instead of giving the options to employees the company were to sell them to the public, then it would be easy to determine their value. And then, we would know exactly how much money to expense. That is why I have stated their value can be approximated by Black-Scholes type calculations just as LEAPS are valued.