In April of 2007, Google (NASDAQ:GOOG) started its new semi-transferable options program.
The plan allow non-executive ESO grantees to sell their vested options to one of four investment banks who will have purchased options with two years to expiration as long as the sold options had 2 or more years to expiration. For the ESOs with two years or less the time remaining is proportionally less.
The expressed idea was for Google to allow the grantees to have another choice and be able to capture the time premium in addition to the intrinsic value.
So Google set up with the aid of Morgan Stanley (NYSE:MS) this scheme whereby four bidders make bids to prospective sellers for their options.
Google has stated that additional options expenses of what is now claimed to be $220,000,000 down from $270,000,000 will be charged for the modified value of the 6,6 million options outstanding and vested. The actual increased value to the grantees is about $22,000,000 or 90% less in my view.
Here is a simple alternative way that Google could have achieved better desired results with far less accounting cost and very little real costs.
Instead of allowing Morgan Stanley to create the scheme, Google could have just allowed the holders of the out of the money or at the money options vested options to turn them in to Google for stock equivalent to the "Fair Value" (with a maximum of two years expected time to expiration) of the options exchanged for the stock.
If the options were substantially in the money, the grantee could exercise his options and receive stock equal to the intrisic value plus the "Fair Value" of the otherwise forfeited time premium with a maximum of two years time premium.
This would have been far more simpler that what has been created. And Google and the employees would have shared the profits that will now go to the Gang of Four.
In addition the $220,000,000 write off against earnings would have been far less.
Someone please tell me where I am wrong.