When ESOs are granted, the entire value consists

of "Time Premium" because there generally is no

"Intrinsic Value" at the grant date.

This "Time Premium" is real value and not an illusion.

The "Time Premium" is what FASB (Financial Accounting

Standards Board) and the SEC require all the companies

to value at the grant date and expense against their

earnings over the vesting period.

When a grantee receives an ESO grant, he receives a value

and the Employer takes on a contracual liability to

perform in respect of the grantee. That liability perhaps has

a value equal to the benefit to the employee. Some

pundits speculate that the cost to the employer is

greater than the real and perceived benefit to the

employee/grantee.

If the stock moves up and is in-the-money then there

is now some "Intrinsic Value". But, there still is "Time

Premium". Often the "Time Premium" is greater than

the "Intrinsic Value", especially with highly volatile

stocks, even if there is substantial "Intrinsic Value".

When a grantee exercises an ESO he forfeits all of the

remaining "Time Premium" and receives only the "Intrinsic

Value" on which, he is required to pay a tax upon

exercise or sale of the stock.

Who gets the forfeited "Time Premium"? The employer

does because his liability to the employee, has been

reduced to the "Intrinsic Value" upon exercise.

Some who call themselves "Options Advisors" advocate

forfeiting "Time Premium" by premature exercises in order

to use the money to diversify (s if a diversified portfolio

is some magic bullet). They essentially advocate that

you return a large part of your compensation to the

employer and pay an early tax for the priviledge of

diversity in some mutual fund loaded with fees and

commissions, which underperforms the indexes.

It is a mystery to me why there is no litigation from

employees and executives who are recepients of this

premature exercise and diversify advice, when it costs

employees an estimated $10 billion a year.

John Olagues

olagues@gmail.com

www.optionsforemployees.com