More Whining About Stock Option Expensing

from the give-it-up-already dept

It’s getting ridiculous how much effort is being put into the effort by both sides on the debate over whether or not companies need to expense stock options. This is entirely an accounting question with no direct impact on cash. It shouldn’t impact a company’s operations in the slightest if they were forced to expense options, but it certainly won’t do a bit of good towards cutting down on fraud (the original reason the concept was proposed). The companies that claim this will kill innovation are making a big deal out of nothing. Anyone who will suddenly change how they feel about a company as an investment opportunity because of this is completely clueless and shouldn’t be investing anyway. That said, the only thing that putting this law in place would really do is give some more money to accountants to figure out how options should actually be expensed — and for that reason alone it’s probably better if things were left as they are on the issue. However, the companies complaining that politicians aren’t paying enough attention to this issue have it wrong. They’re paying too much attention to it.


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Comments on “More Whining About Stock Option Expensing”

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5 Comments
Precision Blogge (user link) says:

Stock options and accounting

Mike,
I think you’re wrong about this one. This is not a super-techie fraud issue, just simple economics. Suppose a company makes an offering of 10,000,000 shares. Many of them get sold at first – for $10 apiece, let’s say – the stock goes up a bit, and eventually they are all sold. The company makes a lot of money to fund its operations.

But suppose the company gives its employees stock options to buy 5,000,000 of those shares at $2.50 apiece. The company holds back half of those shares and does not sell them right away. A year or two later, they sell them for those deflated prices to their lucky employees.

In the long run, the company makes much less money out of its stock offering.

If you were thinking about investing in that company when they first offered those shares, wouldn’t you want the company’s evaluation to reflect this future obligation they have assumed?

– The Precision Blogger
http://precision-blogging.blogspot.com

Anonymous Coward says:

Re: Stock options and accounting

You’re right the company wouldn’t be worth as much, but those 5,000,000 shares would talked about in the 10-K’s and annual report.

The problem with expensing stock options is that giving the empolyees options on the 5,000,000 shares doesn’t cost the company any money and doesn’t affect revenue. It does cost the shareholders through dilution, but that isn’t represented on the financial statements.

Mike (profile) says:

Re: Stock options and accounting

No, you’re confusing issues here. You’re talking about the how many shares the company has available to it to sell to the public — which should have nothing to do with the *income statement*.

This is a question about whether or not those shares should be expensed — not whether they should be given at all.

And, also, your example is incredibly simplified, and suggests a company should never give out option. What you leave out, is that without giving out options, the company will have trouble getting any employees and its stock may be worth *nothing*. The reason a company gives out options is because they get the employees involved in what’s happening with the company and allows them to hire better people.

In the mind of the board, they realize that 10,000,000 shares of nothing is worth a lot less than the possibility of 5,000,000 shares of a much bigger pie.

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