Friedrich-Alexander-Universität Erlangen-Nürnberg Technische Fakultät, Department Informatik Maria del Carmen Romero Aranibar Master Thesis All Aboard the Bandwagon? Employee Stock Options at Caldera Systems Submitted on April 12, 2016 Supervisor: Prof. Dr. Dirk Riehle, M.B.A. Professur für Open-Source-Software Department Informatik, Technische Fakultät Friedrich-Alexander University Erlangen-Nürnberg Versicherung Ich versichere, dass ich die Arbeit ohne fremde Hilfe und ohne Benutzung anderer als der angegebenen Quellen angefertigt habe und dass die Arbeit in gleicher oder ähnlicher Form noch keiner anderen Prüfungsbehörde vorgelegen hat und von dieser als Teil einer Prüfungsleistung angenommen wurde. Alle Ausführungen, die wörtlich oder sinngemäß übernommen wurden, sind als solche gekennzeichnet. _______________________________________ Nürnberg, 12.04.2016 License This work is licensed under the Creative Commons Attribution-NonCommercial 4.0 Interna- tional License. To view a copy of this license, visit http://creativecommons.org/licenses/by- nc/4.0/ or send a letter to Creative Commons, PO Box 1866, Mountain View, CA 94042, USA. _______________________________________ Nürnberg, 12.04.2016 2 Abstract Employee Stock Option Plans offer employees an opportunity to participate in a firms' suc- cess. However, employees who face the decision to exercise their options often lack the so- phistication of professional investors and are therefore more prone to suffer losses from their investment. This case investigates Caldera System's employee stock option plan. The Linux business' initial public offering was shortly before the bust of the Dot-com bubble and em- ployees who exercised their stock options incurred in considerable losses. The case provides the reader with the tools to evaluate Caldera's performance and form expectations on stock market prices prior to exercising stock options. In the case solution, we combine a quantita- tive analysis that draws on methods from accounting and finance with a qualitative analysis of Caldera's business plan and the Linux business. The resulting investment scenarios take the special tax treatment of employee stock option plans into account. 3 Contents 1 Introduction..........................................................................................................................................................7 2 Teaching Case.......................................................................................................................................................8 2.1 Getting a Piece of the Pie: Employee Stock Option Plans............................................................................8 2.2 The Industry: Linux and the Linux Business.................................................................................................8 2.2.1 Linux in a Nutshell................................................................................................................................8 2.2.2 The Linux Business...............................................................................................................................9 2.3 The Company: History and Business Model...............................................................................................10 2.3.1 LST Software Becomes Caldera Deutschland....................................................................................10 2.3.2 Business Model...................................................................................................................................11 2.4 Caldera's Stock Option Plan........................................................................................................................11 2.4.1 Option Terms.......................................................................................................................................12 2.4.2 The Friends and Family Program........................................................................................................12 2.4.3 Exercise and Lock-up Terms...............................................................................................................13 2.5 Making a Decision.......................................................................................................................................13 2.5.1 The Industry........................................................................................................................................13 2.5.2 Caldera................................................................................................................................................14 2.5.3 Tax Implications of Exercising Stock Options....................................................................................15 2.6 Initial Public Offer Right Ahead..................................................................................................................16 Exhibit 1:Article on Linux and the Linux Business............................................................................................18 Exhibit 2:Caldera's Balance Sheet........................................................................................................................19 Exhibit 3:Caldera's Income Statement.................................................................................................................21 3 Concepts..............................................................................................................................................................22 3.1 Open Source Business Models....................................................................................................................22 3.1 Stock Option Plans......................................................................................................................................23 3.1.1 Employee Stock Options Plans: USA and Germany..........................................................................23 3.1.2 Employee Stock Option Plans: Motivation for Employers.................................................................23 3.1.3 Employee Stock Option Plans: Motivation for Employees................................................................24 3.1.4 The Nuts and Bolts of Employee Stock Option Plans........................................................................24 3.1.5 Taxation of Employee Stock Options.................................................................................................25 3.3 Initial Public Offering..................................................................................................................................26 3.2 Analysis of Financial Statement..................................................................................................................28 3.2.1 Indicators on the Basis of the Balance Sheet......................................................................................28 3.2.2 Indicators on the Basis of the Income Statement................................................................................29 4 Teaching Guide...................................................................................................................................................30 4.1 Case Summary.............................................................................................................................................30 4.2 Teaching Objectives.....................................................................................................................................31 4.3 Teaching Plan and Case Analysis................................................................................................................32 4.3.1 Class Discussion.................................................................................................................................32 4.3.2 Assignment..........................................................................................................................................33 4.3.3 Scenario Analysis as a Basis for the Choice.......................................................................................33 4.3.4 Evaluating the Choices (Ex-post).......................................................................................................34 4.4 Master Solution............................................................................................................................................37 4.4.1 The Industry........................................................................................................................................37 4.4.2 Caldera................................................................................................................................................37 4.4.3 Tying it Together: Scenario Analysis and Tax Implications................................................................38 4.4.4 Conclusion..........................................................................................................................................39 References..............................................................................................................................................................42 4 Tables Table 1: Timeline Caldera & LST...........................................................................................................................11 Table 2: Caldera's Balance Sheet.............................................................................................................................20