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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: GVTucker who wrote (172976)	2/10/2003 11:57:37 AM
From: The Duke of URL©	Read Replies (2) \| Respond to of 186894

Rather obviously, existing shareholders are better off if the strike is $15. And yet the dilution is the same in both cases. In both cases, diluted shares outstanding increases from 100 shares to 200 shares. Existing shareholders get diluted down from 100% of Intel to 50% of Intel. Not exactly. You did not include in your example an EXERCISE price. Nor did you include a vesting period; the period the employee must hold the options before he can exercise. If for purposes of analysis, your strike 15s had a current fair market value of 15 then there would of course be no dilution of stock. Nor is there a "dilution" in the stock if the option is underwater and never exercised, and current disclosure rules provide this. If the exercise price equals the stike equals the price of the stock on the market, 15 Dollars more of stock is outstanding, and the company gets 15 dollars in cash; and, there is again, no dilution. In order to properly value the benefit (consideration) paid to the company for the stock, to be issued, you need to contemplate the future value of the option ala some theory of Black-Shoales or some other waco theory, and of course you must subtract from any dilution, the added value of the employee contributing to the company, more than he otherwise would. However, IN NO EVENT is the issuance an "expense" to the company, IT does not cost the company a dime. It may be a dilution to the shareholders, it may 'cost' the shareholders, but it does not cost the company a penny. In fact, it allows compensation of the employee SAVING PRECIOUS CASH!!! That is why the law has provided for the last 70 years or so, that "proper adjustment shall be made to retained earnings", which is currently done. If you both expense it on the books and count the dilution, you are double penalizing earnings per share. It is a disclosure issue, not a cost to company issue. Don't you agree?

To: GVTucker who wrote (172976)	2/12/2003 8:45:57 AM
From: Amy J	Read Replies (1) \| Respond to of 186894

Hi GV, I don't think Berkeley misrepresents the facts. Your example is invalid for public companies for the most part. Try your example again, but this time, assume FMV for grant, which is what most public companies do. Only in your unique example, is there a charge to earnings. You seem to think companies wouldn't charge earnings in such a unique case where grant price is less than fmv, when in fact they would have to in that scenario. Re: pre-notification of a sale by an exec (your other post) Shouldn't allow same-day notification. Better if it's a day or two advance notification. Re: reprice vs refresh (your other post) It sounds like reprice is for startups where there's less impact to the larger SOP% and a hit to earnings isn't as big of an issue, while refreshes are for large companies where there SOP% is small to begin with but earnings being key to protect. Re: giving shares instead of options (your other post) Handing out shares is like handing out money. The job is done. Handing out options is like handing out a promise to get money, if they perform and if the stock goes up. Please think hard on this one. It's a really bad idea to hand out shares, rather than options. More costly to process too. (Ref my post on Cisco thread.) Also, a student is less likely to be able to engage in a project if the reward is shares rather than options - this is because the student would have to pay a tax immediately (shares) rather than later when they can afford it (options). Options increases the pool of players out there to participate, including the less than advantaged pool. Shares doesn't do that. On another note, do you know if options from SOP pool can be rewarded to an actual company, rather than an individual? (I don't think so, but am going to check with our lawyer.) Or, do people usually use investor warrants instead? Could be a good way to get backup second sourcing on some key components, rather than cash out of pocket. When this market turns, the supply will not be reliable for small companies, because of the buyout of one of the most trustworthy & reliable disty firms for small companies (that used a straight-line supply model which guaranteed everyone got some minimal supply) by a large player that deploys a different supply model aka boom/bust model (if they have it, they give all of it, rather than reserving some on the side, and if they don't have it, they won't even give even a minimal amount of supply, just zilch, i.e. a company could go bellyup if it trusted them in the area of supply planning. Many in the industry tend to believe this merger will create poor supply to small companies, so there's more talk of second sourcing these days than during the boom - which doesn't hurt the disty (why would they care which component is bought - maybe they favor smaller mfgs for the margins.) Only hurts the large mfg and the small companies, but since large mfgs don't have programs for small companies to guarantee reliability of a certain minimum amount of supply, second sourcing is a necessity if one works with a large mfg. (A person doesn't have to do this with small to mid-size mfgs, because you can just walk into the company and get a minimal supply from the vp of ops even in a shortage situation, unlike a large company.) It's funny, one could definitely count on reliable supply during the really huge boom even where huge inventory shortages existed, but given the recent shift in the distribution channels, it would be risky to trust reliable supplies anymore. That particular disty merger essentially may have the net of costing small companies 1m each for 2nd sourcing (unless options can be used to reduce the hit), if they work with a large mfg. Blah. If they don't, the disty merger is equivalent to saying, startups shouldn't work with a large mfg unless the startup has a valuation of $50M which is a 2nd source cost of 2% of val. I hope the market doesn't turn around anytime soon. Regards, Amy J