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Since a few folks have wondered what a "stock option" is, a couple
definitions:
Dull and literal: The company gives you a piece of paper that says you can
buy (for example) 1 share of their stock for $10; you don't actually buy
anything at this point, and you didn't actually get paid anything other than
the cost of the paper. Here's how you make your money: If the stock price
rises to $100, you can still buy it for $10 by using your option, and if you
immediately sell it for $100, you pocket the $90 difference as profit. If,
however, the stock price falls to $0.10, you'd be nuts to use your option,
since you'd be paying 100 times what the stock is actually worth. On the
plus side, since you didn't actually commit to buying the stock, you can
burn your option in the fireplace to keep warm this winter and regret that
you didn't insist on $10 cash as part of your contract. In short, when you
accept a stock option, you're gambling that the market price of the
company's stock will go up so you can buy the stock cheaper than you could
if you went to a broker.
Cynical: (i) A means of avoiding paying contractors and employees out of
your own budget. If the option becomes worthless because the company has no
inherent value and the market recognizes this, you just saved a pile of
money on contractor fees or employee benefits because you didn't actually
spend any money. On the other hand, if the stock does go up in value, the
money doesn't come out of your budget since the options are funded by the
company as a whole and, in theory, you've made so much money on market
speculation that you can afford the expense. (ii) A means of compensating
executives for reducing headcounts, thereby inflating the short-term value
of the company so the executive can sell the options and head for the hills
before the market realizes that the company no longer has any employees left
to generate value for shareholders.
A landmark hotel, one of America's most beautiful cities, and
three and a half days of immersion in the state of the art:
IPCC 01, Oct. 24-27 in Santa Fe. http://ieeepcs.org/2001/
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