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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Ira Player who wrote (61186)	8/30/2002 11:09:42 AM
From: GVTucker	Read Replies (1) \| Respond to of 77400

Ira, RE: What would you pay for an option that, on top of the movement of the underlying stock price, was dependent on something outside of your complete control? (Hows this: The option is only valid if your 10 year old cat, which is allowed to go outside, is still around in 7 years.) I don't think so... Sure I would. What do you think insurance companies do every day? The only difference is that they use humans instead of cats.

To: Ira Player who wrote (61186)	8/30/2002 11:44:12 AM
From: rkral	Read Replies (1) \| Respond to of 77400

OT ... Ira, By European-style, I only meant that the original Black-Scholes equation assumed conditional exercise at the end of the option term. I made no other claims about the comparability of European-style options to employee stock options. As to your points: >>An employee with 7 year vesting leaving at 5 years gets nothing.<< In my admittedly limited experience, I have yet to run across an instance of "cliff-vesting", where 100% of the options become vested at one time, and especially after a time period as long as 7 years. A much more likely scenario is 20% vesting after the 3rd year, and additional 20% vesting amounts after the 4th, 5th, 6th, and 7th years. (And even that is a pretty stiff vesting requirement IMHO.) So, if the employee leaves after 5 years, it is much more likely that the employee was at least 60% vested, rather than the 0% vesting you suggest. That's hardly nothing. (Of course the options may be underwater. See below.) >>Unless there is a method of modifying the formulas to take this into consideration, the model overvalues the options significantly.<< Sorry, but the effect is included. The formula is not modified .. but estimated and actual forfeitures reduce the option costs to the company (per SFAS 123) by reducing the number of shares. >>What would you pay for an option that, on top of the movement of the underlying stock price, was dependent on something outside of your complete control?<< That's the nature of options. IMHO companies and employees are still figuring that out. The key word is options. Options are one of the riskier ways to invest (gamble may be the better word). By definition, the outcome is unpredictable. If options expire worthless or become deep-out-of-the-money (DOTM) .. employees complain because they aren't being compensated. If the employee can't accept a $0 result from their option "compensation", when it occurs, they should reject the options and insist on cash compensation. If options become deep-in-the-money (DITM) .. shareholders complain that employees are being over-compensated. If shareholders can't accept that option compensation might become very large, they should take steps to reduce option compensation at "their" company, or invest in a different company. Your cat question is funny but ridiculous IMO. <g> Ron