To: rkral who wrote (64483 ) 9/13/2003 1:52:55 AM From: Don Lloyd Read Replies (1) | Respond to Ron,bold and deleted or replaced text will be enclosed in [brackets and italicised ].bold and italicised share [option, with an exercise price of $33 ] when the stock price is $33, to each of our 20 employees. Let's speed up the entire option life cycle by assuming no vesting requirement -- these options are exercisable immediately -- and that the stock price jumps to $50 the very next day. Let's further assume all employees exercise at that $50 price. ] $330 [$500 ] out of each of our pockets. Our employees pocket $33 [$17 each ($50 - $33) ] for a total of $660 [$340 ].and exercise ], there were 980 shares outstanding of which you and I each owned 50%. After, there are 1000 shares outstanding and we each still own 50%. Obviously, net income must be now divided by 1000 shares, instead of 980. [That's the dilution -- with which you apparently agree .] Note -- There is no longer any ownership dilution because we have individually repurchased the shares to restore our 50% individual ownership levels. At this point any desired total number of shares can be made to exist simply by the use of either forward or reverse stock splits with no impact on anyone. As a result of the exercise, shareholders' equity has increased by $660 (20 * $33). We're the owners, so we declare a $0.66 per share dividend. You and I both pocket $330 (500 * $0.66), reducing our cost to maintain 50% ownership to $170 each ($500 - $330). ] Note - With stock given away, there has been no money paid into the company for any exercise. $660 [$340 ] total less in our pockets, and the employees have a $660 [$340 ] total more in theirs. We each owned 50% of the company before, and we still own 50%. The company is worth exactly the same after as before .. but there's been a $660 [$340 ] transfer of wealth from shareholders to employees. [That's the expense. The fact that you and I paid the expense makes no difference. Effectively, we paid that expense on behalf of the company .. and it is compensation income to the employees. ] Note -- The company exists for the benefit of the shareholders, the shareholders do not exist for the benefit of the company. The $660 expended by the shareholders to restore their 50% individual ownership of the company is in no way a company expense. It is an entirely voluntary restoration of the ownership of the company. The $660 is a cost borne by the shareholders and it is the only cost as there is no longer any dilution of ownership even though the total number of shares may have changed. If you and I didn't restore our 50% ownership shares, then there would have been ownership dilution, but then no $660 cash expenditure.
