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To: Amy J who wrote (172718)	1/30/2003 4:26:01 PM
From: GVTucker	Respond to of 186894

Amy, RE: Tradeoff is, dilution by refresh no charge (vs) non-dilutive by reprice but charge to earnings, right? Depends. A lot of times the options are so far out of the money that they aren't dilutive any more. In this case, your second scenario is both a charge to earnings and dilutive. But in a private company, wouldn't a reprice be a better option if a company is not profitable (because there would be no resulting tax hit on the charge). Said another way, can you conclude who in the valley is non-profitable if they've repriced -or- profitable if they've refreshed? (I'm asking) First of all, remember that your tax books aren't the same thing as your financial books. I'm not positive on the tax implications but I'm pretty sure that you can deduct the difference between the exercise price and the market price upon exercise as a taxable expense, even though it isn't an expense according to GAAP. Seems to me you're also ignoring a whole host of internal issues that could arise in a repricing. In most cases, everyone at a firm doesn't have the same strike on their options. If you reprice some but not others, aren't you giving a reward to some based only on their strike price? That would strike me as a questionable compensation policy. I suppose that if everyone had the same strike and expiration that concern wouldn't exist, but that doesn't happen too often. Why wouldn't a startup do it this way? It would reset grant date, but couldn't vesting date be sent back to make up, so it's a wash on the dates with no impact to employees, no charge to company and non-dilutive to investors so how does this negatively impact anyone, what am I missing? Is this "back door" done often by startups? Is the strategy endorsed by the high-tech law firms? The main thing you're missing, IMO, is that the primary reason the back door method is used is to avoid shareholders finding out that they just gave up some more equity. In a private company it isn't necessary to play this game. In both cases, the reprice and the back door, existing shareholders get diluted. (Again, remember we're talking about the GAAP financials here.) A private company usually doesn't have an incentive to deceive shareholders, so the back door method isn't used. On another note, if startups had the choice of hiring someone at x% equity at $g, why wouldn't a startup simply hire at x-y% (reduce equity, so less painful to investors) at a discounted $g-$d (but create discount on grant price to make up equally, so its fair to new hire), where the cost of the discount on grant would be a charge to earnings that would hit the books, but it wouldn't be taxable if a startup decided to remain non-profitable in the year of hire (so who cares, right?), and the result is less dilution, meaning there's more SOPs to distribute to others. What are your thoughts on such a strategy, if such a strategy exists? And most important question: would the charge hit the books as it vests ($g-$d)/(#vesting yrs) per year, or all at once in the first year of grant? I'm sorry, Amy, but you've just confused the heck out of me. One thing I do see up there is that you're mixing taxes and GAAP financials. Remember, they aren't the same. I know a little bit about GAAP, but I know next to nothing about taxes. This stuff you need to run by a tax accountant.