[Politech] Andrew Odlyzko: A third perspective on stock option expensing

From: Declan McCullagh (declan@private)
Date: Tue Apr 13 2004 - 08:40:44 PDT

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    -------- Original Message --------
    Subject: Re: Jim Delong's dissenting view on stock options expensing
    Date: Thu,  8 Apr 2004 08:02:18 -0500 (CDT)
    From: odlyzko@private (Andrew Odlyzko)
    To: declan@private
    Here is a comment on the recent exchange.  Please send it
    on to the politech list, if you think it is appropriate.
    Jim DeLong and Martin Hutchinson take contrasting positions that
    are both questionable.  Stock options are neither embezzlement
    nor a triumph of "the creative class."  They can be very valuable
    compensation instruments.  However, their current accounting
    treatment (which basically ignores them) presents a distorted
    view of an enterprise's financials.  Unfortunately, expensing
    options will also lead to a distorted view.  The basic problem
    is that options are rather complicated derivatives, and the
    standard accounting measures are often inadequate in dealing
    with them.
    There is no simple way to see this, and one has to go through
    some detailed examples that show what the effect of options is.
    I did that once, using an extremely simplified model of a high-tech
    startup that relies almost exclusively on options to compensate
    employees, and a similar one that only pays wages.  This example
    is presented in a letter to Barron's on this subject that I sent
    them in 2002, and is available at
    A very brief version of it was published in the August 5, 2002 issue
    of Barron's, and is available at
    Andrew Odlyzko
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