Illustrates that Companies and the Wealth managers promote the premature exercisesin violation of the fiduciary duties and violate Rule 10 b-5 by forcing inefficient strategies. John Olagues www.truthinoptions.net olagues@gmail.com 504-875-4825 http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470471921.html

1. .
John Olagues
Truth In Options
504- 875-4825
www.optionsforemployees.com/articles
olagues@gmail.com

2. Below are links to the Google Stock Plan document and to
the Cisco Incentive Stock Plan document:
Google
http://www.secinfo.com/d14D5a.r3mD3.d.htm#1stPage
Cisco
http://www.secinfo.com/d14D5a.v5RKa.d.htm
Although both of the Stock Plan documents prohibit transferring or
pledging the employee stock options (Google allows a limited form of
selling to selected banks and under some circumstances the
Cisco options can be transferred to family members), neither of
these documents have a prohibition against hedging with
exchange traded calls and puts.
Nor is there any prohibition against hedging in the Options Award
Agreements.

3. The Stock Plan and Award Agreements are the
documents that constitute the contract between the
company and the grantee regarding the granted equity
compensation.
Since there is no prohibition against hedging in the
contract documents, why do many companies discourage
the strategy? Some even tell their employees that
hedging is prohibited by the plan.
If holders of employee stock options are prohibited from
hedging ESOs, then why is it not written in the Stock
Plan documents?

4. The answer is that the company officials know that there is generally
no prohibition in the company documents but they know that
premature exercises benefits the company in three ways as below.
1. The employee forfeits the remaining "time premium", which the
company recaptures.
2. The employee pays an early tax, and the company gets an early
deduction from income tax, equal to the difference between what the
grantee buys the stock for and what the stock could be sold for in the
market.
3.The employee pays the exercise price early and that
adds to the cash flow to the company.
Therefore, the company encourages premature exercises by ESO
holders.

6. But when most of the plans were established, there was
no prohibition against hedging. And the plans require
that if there is a change to the plan which may be
adverse to the grantee, the company needs the approval
of the grantee.
So the companies can not just insert a
prohibition against hedging into their present plans,
because that diminishes the value of the ESOs to the
existing grantees and those who relied on there being no
prohibition.

7. So the companies try to make employees think that there is
a prohibition when there is none. But there is a drawback
to that strategy and that is if the company adviser tells
the employee he can not hedge and the stock goes down
after he is told that he can not hedge, the company would
be liable for damages.
Also, in my opinion, the advisers who tell their clients that
they can not hedge when the documents clearly allow
hedging, open themselves up to a liability similar to the
company's liability.
The difference in after tax value that the grantee will receive
is on average about 40% more from hedging compared with
a premature exercise strategy with the stock 90% above the
exercise price. So the liability is not incidental.

8. In this part of the presentation, I will refer to the specific parts of
the plans and discuss the fact that in both the Google and Cisco
Stock and Options plans, there is very limited transferability and
no pledgeability but no prohibition from hedging.
I will also discuss the fact that both plans mention that the plans
can not be amended without the approval of the optionee.This
prevents the company from adding a prohibition from hedging
when none was there prior.
In the Google plan, Paragraph 4b(v) discusses the duties and
abilities of the Administrator but he does not have the discretion
to prohibit hedging. Paragraph 14 discusses the ESOs non-
transferability. There is no prohibition against hedging there.
Paragraph 18 c) discusses the fact that the plan can be
amended only with the participant's approval. See the link
http://www.secinfo.com/d14D5a.r3mD3.d.htm#1stPage

9. In the Cisco plan, we find that the plan does not prohibit
hedging but does prohibit transfers or pledging.
Article 1, Paragraph D, under Administration of the Plan ,
illustrates the limitations of the Administrator.
Article 2, Paragraph G under Options Terms describes the
prohibition against transferring, selling and pledging but
hedging is not mentioned.
Article 5, a paragraph which is titled Amendment to the
Plan does not allow an amendment which may effect the
rights and obligations of optionees in the plan unless with
the is approval from the optionees.
http://www.secinfo.com/d14D5a.v5RKa.d.htm

10. In summary, Google and Cisco have no prohibitions against
hedging. Holders of ESOs are free to manage their equity
compensation as they see fit as long as it is consistent with the
Plan Documents and Options Agreements and 10 b-5, without
further approval from anyone.
Those who tell grantees that they are not allowed by the
company to hedge when the documents permit hedging are
subjecting themselves to liability.