How eBay Cashes In on Employee Options

eBay (EBAY Quote) has become known as a cash machine. But much of the cash the company has generated in recent years has come not from its thriving auction business, but from the brisk sales of stock options by its employees.

Nearly one-fifth of eBay's operating cash flow last year came from the tax benefit related to stock options. Meanwhile, the money generated from that tax benefit plus the actual cash it saw from employees selling their options was equivalent to eBay's free cash flow last year and helped swell the company's cash-on-hand position.

This options-related cash forms a large fraction of the company's overall cash flows, which are touted by analysts as an indicator of value. And the sheer amount of options being exercised at eBay raises questions about fairness to shareholders. ...