Subject: Re: Did I Do the VA Math Wrong?
From: "Stephen J. Turnbull" <>
Date: Mon, 20 Dec 1999 10:53:25 +0900 (JST)

>>>>> "Crispin" == Crispin Cowan <> writes:

    Crispin> David Welton wrote:
    >> On Fri, Dec 17, 1999 at 02:58:48AM +0000, Crispin Cowan wrote:
    >> > What am I missing here?
    >> 250,000,000 * 30 = 7,500,000,000
    >> Could that be what you're looking for?

    Crispin> Seems to be coincidental to me.

Quite right.

    Crispin> Tim O'Reilly wrote:

    >> The number of shares authorized doesn't equal the number of
    >> shares outstanding.  This is quite typical.

    Crispin> There's the rub.  I had thought that market cap was
    Crispin> "price * shares authorized" not "price * shares
    Crispin> outstanding".  So that means that VA only has about 10%
    Crispin> of their authorized shares outstanding.  It's still a
    Crispin> rather interesting structure.

Suppose there were no authorized maximum.  Then the company could
issue as many shares as it wants to, sell them to who it wants to, at
any price it wants to, and so rip off the original investors.  (There
are now certain common law limits to this, but it has successfully
been done often enough in the---somewhat distant, 1800s or so---past.)

So basically what's going on is that the VA venture capitalists and
management are retaining the right to grab back 90% of the company (in
addition to whatever they already own) at any time by issuing more
shares.  Thus there are in principle no limits to the amount of
options they can issue to their key people.  (I assume you've heard
the factoid that Microsoft hasn't made a real profit in years, because
the value of the options they've issued to employees, if exercised,
would use up all the surplus?  It's true, and the authorized
vs. issued gap is how they get away with not reporting the value of
options as employee compensation.)

In practice, they won't go so far as to take 90%.  (a) They have
fiduciary obligations to their stockholders, and a court would
probably uphold a stockholders' rights suit.  (b) The VCs have
reputations to maintain.

But anybody holding VA stock is at great risk of taking big paper (and
real, if they bought at a high price, which some people must have by
definition of "market price") losses simply because the company
announces a "pat-ourselves-on-the-back" bonus paid in more options.

Of course, an economist who maintains the "strong rational
expectations hypothesis" would say that that possibility has already
been discounted (ie, the market price would be even higher except that
it has already been discounted because the investors understand the
possibility that their stakes will be diluted by issuing more stock or
options), so there is no problem (except more risk, because exactly
how many such shares would be issued is uncertain).

I'm not one of those economists....

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