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To: Amy J who wrote (63006)	2/7/2003 8:52:45 AM
From: hueyone	Read Replies (2) \| Respond to of 77400

SOP% = Total Stock Option Pool percentage is reasonably fixed. That statement above, which you made multiple times, simply does not match up to the stats---(although you did not clearly define SOP%.) I already posted information to you demonstrating that there has literally been an explosion in the use of options over the last 15 years. How can you justify continuing to post that option use is reasonably fixed? Precisely because there is no accounting for stock options, there are no standards. And the degree of stock option abuse is both increasing and accelerating imo. Sigh. Here is the information again: 1. That stock option overhang ((a measure of outstanding options plus options authorized)/shares outstanding), has doubled over the last decade: businessweek.com 2. That stock option overhang has almost quadrupled since the early eighties. ceonewswire.net 3. That CEO pay buoyed by steadily increasing options grants has grown from 40 times the average workers pay in 1980 to roughly 515 times the average workers pay by 2000: e-insite.net. 4. That the pace of rising CEO pay has accelerated in the last decade, moving from 100 times the average workers pay in the company to over 500 times the average workers pay during the 1989 to 2000 year period: levin.senate.gov 5. That the value of stock options grants, partially due to increasing grants of options, has increased twelve fold since 1993: marketwatch.com. 6. That the average stock option overhang for tech companies now far exceeds even what liberal minded compensation consultants would say is an optimal level to increase shareholder value. At the end of 2001, stock option overhang for tech companies was about 66% than WatsonWyatt's supposed "sweet spot". cfo.com 7. And that far from being any standards, some companies, like Siebel systems for example, have stock options overhang that are triple that of the average company in the tech sector: Message 18491021 Regards, Huey

To: Amy J who wrote (63006)	2/7/2003 9:10:06 AM
From: hueyone	Respond to of 77400

Standard and Poor's Core Earnings Update Here is more evidence of a lack of standards, no pun intended. Notice that in this Standard and Poor's mid year update for Core Earnings, that some companies reported earnings are totally wiped out and then some when they expense options and make the other adjustments that Standard and Poor's recommends, but for other companies Core Earnings are not so far off from GAAP earnings. Nevertheless, the overall gap between GAAP and Core Earnings, were Standard and Poor's publishing Core Earnings earlier, has been widening. bwnt.businessweek.com Explanation for Core Earnings: www2.standardandpoors.com Regards, Huey

To: Amy J who wrote (63006)	2/7/2003 10:59:39 AM
From: Stock Farmer	Respond to of 77400

Hi Amy, yes I too am a founder and owner. Several businesses. The issue is one of compensation and cost. And there are two entirely separate domains. I get the perspective that you are talking from the perspective of a startup company, where options are a NECESSITY. For the majority of people on the thread however, investing in startup companies is not an option (forgive the pun), and so my discussion has been framed with the assumption of a public company. Startups are completely different than public companies. As you are of course well aware. Startups bear a HUGE cost of capital. As you know. Those "evil" investors want a return that justifies the risk, and know that since some of us aren't going to make it they need to take their failure out of the hide of the successes. They lend out dimes after filtering for conditions that give them potential for between two and five dollars back within the next five years. Don't like those terms? We go find money somewhere else. Simple. And they know that the surest way we fail is to burn through their dimes like they're candy. Furthermore, they know that when we don't have any dimes left we are going to want to come back to the well. Which they want to defer as long as possible so they can bring folks in for quarters and maybe even dollars to start spreading the risk around. So they don't want us paying cash on anything we can avoid. And our biggest expenditure (assuming we aren't burning our neurons into silicon) is labor. Compensation. So we pay our indentured servants in equity compensation. Options. They look at dimes now and dollars later and they are willing to sacrifice maybe a quarter's worth of compensation in order to get between two and five dollars later too. Voila, employees suddenly become amateur VCs, financing us to the tune of about 30%. Which everybody likes. VC puts in $0.70 and gets $1.00 worth of work done, of which he gets 40% of the value and you get 30% and employees get 30%. As opposed to putting in $1.00 and getting $1.00 worth of work done, of which he would get 57% and you get 43% and employees get a fair wage all cash. It's pretty clear out of whose whose hide this trick comes. Founders pay employees a reduced cash wage and an increased equity wage so that they don't lose so much control of the company early on and don't have to raise so much cash. Oh, stock options are wonderful things. Because of how this game is played. Where does the reporting of stock options belong? In the same place as all the rest of the equity financing that is going on: the cap table. And also in the wages column, because that's where the financing is going. And where do wages belong? As a cost on the income statement. Just because startups don't account fully for wages is hardly the argument that public companies shouldn't account for wages. If public companies did everything the way startups do it, there'd be havoc in the streets! LOL But let's look closer at this situation. How do you as a "founder" make your money? So long as you can find someone else to buy your shares at more than it cost you to acquire them, you "profit". You also claim yourself to be an owner. But you really aren't thinking like an owner at that point, more like a tenant looking to sublet in a tight rental market with spiraling prices. If you were thinking like an owner you would not worry about what your shares are worth to someone else. You would worry about how much wealthier the company is making YOU and the folks who hold 100% of the shares. This is a big difference. And you wouldn't make much money. Ergo you have millions of dollars worth of incentive to think like a tenant. Hard not to, for some people. But once the millions roll in the first time, a thinking process starts to kick in. You know "now that I can afford it, next time I'll do the whole thing myself"? And then, looking at things in retrospect, one might start thinking like an owner. And it wouldn't be too long before the fundamental switch clicked: if you did think like an owner, what you would worry about would be profit. Being the difference between revenue and all of the costs of generating that revenue. And having gone through the process you would know that it's OK to have negative profit for a while, and in fact it's absolutely necessary. The important thing however is to generate enough positive profit afterwards to generate a return. So you would look at your company in a new light. And you would see that yes, the company is reporting an accounting profit to you. Call this "Earnings". Assuming the company can maintain this profitability forever, you can take this "earnings" and figure out how big a pile of T-Bills it takes to give you the same amount of "income" and pretty well establish an equivalent value for your holdings. But wait a minute. In order to accumulate these "profits" management (which includes you now, the owner) informs you that it is also necessary to motivate employees. And that over and above the wages that are factored into this profit, they expect YOU to cough up from your pile of T-Bills to pay this motivation fee. And if the amount you had to pay was more than the profit the company was generating, well then for all the "profit" the accountants are showing you, you would be accutely aware that the darn thing is making you rich in the wrong direction! Yikes! Would you still run around telling all your friends how profitable the business is? Would you go comparing the margins your company is making to the margins of some old-economy construction company and sneering down your nose? I think not. In fact, you might start wondering how deep your pockets are and how long you can afford to hold onto this negative net worth creating machine before it sucks you dry. And you would be all over management with marching boots trying to figure out how to either get those profits up or find a less costly way of motivating employees. It is very difficult for shareholders of public companies to think like owners. Particularly when the cost of motivating employees is stealthily concealed. Not hidden really, just not blabbed around. Kind of like those dangerous local secrets that everyone in the town knows but doesn't speak about for fear of damaging the tourism industry. And particularly when there are entire constituencies of highly educated financial wizards and captains of industry and founders and employees out there whose vested interests (selling their shares to Joe 6 Pack) are completely misaligned with informing Joe 6 Pack of all of the facts of the situation. One way of making it darn nigh impossible to avoid forgetting about the motivation fee is to put it up where it belongs, right beside profit. So that OWNERS know what it is they are getting, net of what it is that it costs. After all, it is a wage. And putting things where they belong is the whole point about accounting. This won't change things one iota for startup companies. We all know how that game is played and the importance of stock options. The change will be in the minds of Joe 6 Pack. Who moves the margin of the market but not the bulk. What it will change, profoundly for some poeple, is how folks who should be owners will value "profits" being reported to them by management. Not all that glitters is gold. Lose sight of that at your peril. Maybe go take a look at your company. Try to figure out the equivalent wage cost of your company that the options you are granting represent. You know they are a wage by how many people would quit if you took 'em away, or how much more you would have to pay new hires to join if you didn't have options. They are a cost of doing business and therefore have to count against "profit" in the final reckoning. Ask yourself how "profitable" your company really is if it has to pay that wage on a go-forward basis. Feel free to correspond via PM if you don't want to disclose confidential information. John