So if you’ve had a chance to see The Social Network, or as most people like to call it, the Facebook movie, then you remember how founder Mark Zuckerberg allegedly diluted the stock options of his partner and friend Eduardo Saverin. I tried to find a video clip of that part of the movie but I guess it wasn’t the most interesting scene.
So here is the script from that scene. You’ll just have to imagine it in your head. Fortunately Aaron Sorkin, the screenwriter, creates a visual with his words.
Basically, Eduardo and the other owners of Facebook were awarded stock options once the company incorporated. (They were and still are a private company but shares may be awarded, bought and sold privately. As of this post the Facebook IPO has not yet materialized. Private companies like Facebook and Reliance Protectron review their own financial books and do not have to open them to the public.)
For a public company, stock options awarded to executives are a performance incentive. Their primary purpose is to tie the success of the CEO, or other executive, to the stock price. The incentive based stock options allow the employee to purchase stock at a set price at some point in the future. They are very similar to the stock options we discussed before.
When researching a company for an investment you should check the compensation, or pay structure, of the top decision making executives. Also check to see how often they are cashing in their options. This may give you a heads-up, because bad news means bad stock price. And of there is lots of cashing-in going on then their might be some bad news releasing soon. I wrote a guide on how to find executive pay on Morningstar that would be a good start.
Ok, now I want to watch The Social Network again…
Photo Credits: http://newadvertising.org/the-social-network
The Social Network Script: http://wiscreenwritersforum.org/wp-content/uploads/2010/01/Social-Network-The-by-Aaron-Sorkin-May-28-2009.pdf
Legal stuff: The Social Network is property of Sony Pictures Digital. The screenplay is also available here.