Outcome Project Unit 3
Dot.Com or Bust!
“Issues of a Crash”

Don Flores

Bachelor’s Capstone in Management
Professor Reeley
Monday April 9, 2007

The idea of a crash did not enter the minds of those who initiated the Dot.com Era. The whole idea was to create an avenue for online advertising and target a new marketing interest. People were shopping online already, so why not give them advertisements to see while they are in a shopping mode. In essence the thought was “if they see it they may buy it”. The idea that Web traffic could be converted into ad dollars -- that "eyeballs" could be monetized -- led to some of the most overpriced acquisitions of the dot.com era. Remember when ExciteAtHome paid $780 million for BlueMountain.com, the online greeting company with 11 million monthly visitors and negligible revenues? (2005) The company had many hits on its web site, but it was mostly free e-cards that were being accessed. I, as did many, took advantage of the free cards not realizing that we were eventually help the companies to perpetrate frauds in actual stock prices.
As these companies grew and were being noticed they began selling stocks and offering stock options to the employees. Managers of these companies were looking for ways to link employee compensation. This link was in the form of stock and or stock options. The idea seemed to be a great idea at the time, but no one looked towards future reality. The employee was looking forward to the future appreciations in the stock for the solution to retirement and living well while retired. The idea was that the company would grow and the stock would increase the compensation would come from the increase in the market price over time. It seemed to be a ‘no-lose-everybody-wins’ situation. The employee would receive compensation and the company would not have to release any cash for that compensation. The only way the employee was going to receive anything is if the stock price increased; otherwise, they gained nothing from the compensation. (ET All, 2003)
In a perfect world a stock option grants an employee the right to purchase a specific number of shares in the company at a fixed price (also called the grant price) for a specific number of years. If and when the share price increases, the employee can exercise (or purchase) the stock at the lower fixed price, then sell it at the current market price, realizing a gain. Stock options may be nonqualified (meaning it does not receive special tax treatment under the IRS code) or incentive (which do qualify for special treatment). When you exercise nonqualified stock options and then sell them, the gain is taxable as ordinary income. The issuer, who gets a tax deduction for the same amount, can issue as many nonqualified stock options as it wants to employees, officers, directors, consultants and vendors. (ET All, 2006) If the employer uses the Incentive Stock Option it limits the ISO’s at any given year to $100,000 annually and the employer does not receive tax deductions when the employees sell or exercise their ISO’s. (2003)
It would have behooved the employees and employers to begin their journey into stock options as a form of compensation by looking into possible issues that would occur in the event of a crash. In the start-up frenzy of the dot-com era, many cash-challenged companies offered employees a piece of the future in lieu of current payroll or cash bonuses. That piece of the virtual profit pie (a stock option) had long been a method of compensation or bonuses for high-place executives, so why would it worry those who are on the lower rungs of the ladder? The wealthy has had the advantage of tax nets, so why shouldn’t the middle-class? Now, instead of a tax net for the wealthy, the alternative minimum tax has become the “stealth tax”, torpedoing upper-middle class taxpayers who don’t see it coming until they hit line 44 of their 1040. (2006) Think of what the employees could