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Technology Stocks : PSFT - Fiscal 1998 - Discussion for the next year -- Ignore unavailable to you. Want to Upgrade?

To: Lizzie Tudor who wrote (3177)	10/23/1998 1:38:00 AM
From: Chuzzlewit	Respond to of 4509

Michelle, that is exactly what happens in most cases, and it is done for tax reasons (to avoid AMT). This issue was exhaustively discussed several months ago. The basic problem is that the cost of the option (represented by the difference between the price of the stock and the price at which the option is exercised is never explicitly stated as an expense on the income statement. In effect, this takes money directly out of the shareholders pockets and the company does not account for that money, regardless of whether the employee sell or holds. Here is an example. Suppose the capitalized value of a company is 100 MM based on 10 MM shares o/s, so the value of each share is $10. Now suppose the company issues 1MM shares to employees at a price of $1 each. Now the value of the company ought to rise to $101 MM reflecting the sale of 1MM in stock, but now there are 11MM shares outstanding (whether or not the employee sells or holds). So the value of each share decreases to $9.182. It is bad enough that so many tech companies rely on this method of compensation, but it becomes worse when you consider that many of them reprice options which destroys the entire rationale for granting options to begin with (putting employees and shareholders on the same side). Now, what makes this even worse is that the ordinary worker receives relatively little benefit from this deal. The lion's share tends to go to the very top levels of management. You can see this stuff in action by checking out the Yahoo insider option when you look at any stock. SEG is one of the worst offenders in this regard. TTFN, CTC