David Harper

Closer Look at Gooptions: More PR Than HR

Kew, I won't quibble with your time value analysis (due to volatility skew, underwater options have lower volatility, so that's an offset but your point remains). Your logic would be correct if selling were mandatory, but correct me if I'm wrong, this is a third option to employees. This is an embeded option in the traditional options. Therefore, it adds value. I can keep the regular option or cash out this way. That's an improvement.

Your point is merely that, perhaps, with longer tails, they should keep the option rather than sell. But even here, we financial theorists forget reality sometimes. Over 90% of options are cashless exercised within 18 months of final vesting. Why? Because employees are not perfectly diversified and they have liquidity preferences. A preference for cash today may be perfectly logical for a GOOG employee who has 95% of his/her wealth tied up in GOOG stock. Your point best applies to a diversified portfolio, where the GOOG wealth share is not predominant, and invidivual risk aversion is normal.

Google's Stock Option Plan: Good For Shareholders, Too

I agree these are mostly good but think you've overstated the benefits. In numerical terms, yes fewer options will be granted, but investors (I'd argue) should not be counting the number of options granted. Better along the lines of ISS and their shareholder transfer value; if you look at economic dilution, these are going to be more costly because they have longer natural lives (the first life to exercise/sale plus the second life where the bank is still riding the "dilutive tail" of the option). So, fewer options but higher per-option value/cost/dilution.

Also, I don't buy the reduced risk because in terms of shareholder costs, you've got (I think) either accounting or economic (dilution) costs. Re accounting, I don't know the FAS 123 treatment, but these won't be cheaper "at grant." I don't see how this helps the problem of expensing at grant (and if i were pricing these under black-scholes or binimial), they'd get a slighter higer cost. So, similar to above, accounting cost is still fixed at grant (a huge problem!) and mostly a wash (fewer options, higher per-option) on the comp expense.

On alignment, I agree with you this could be a problem but you could argue the other side too: employees tend to exercise soon after vestin if they are in the money becuase...who wants to gamble?...but these smooth out the risk. The volatility of these ought to be less than the volatility of the intrinsic value, so I would think employees may be encouraged to hold them a little while longer.

On balance, good for employees and therefore, indirectly, for shareholders. But because this is a market *after* vesting, don't see it solving the difficult "at grant" problems.

Valentis Plunges 80% and Analyst Says "Hold" (VLTS)

Chris - Thanks for this. This also shows the problem of simple "buy" or "strong buy." Apparently, this was sort of a binary real option, worth $x if passes FDA trial, worth about 0 if not. So the purchase is a portfolio issue (is the high risk option suitable for my portfolio) or at least a bit more complicated than simply "buy it." But thanks for highlighting this, this is my gripe with sell side, too. They give you after-the-fact "gee thanks" help because they are so obsessed on near term guidance