Editor, myStockOptions.com

How Steve Jobs Lost Over $4 Billion

In "Steve Jobs' Bad Bet" (Fortune, March 19, 2007, page 67), columnist Geoff Colvin takes a somewhat similar look at his stock grant exchange.

The reality is that even visionary CEOs do not fully understand the upside value of their stock options. Once options are underwater, executives and employees have trouble seeing that they still have value given the number of years until the options expire (usually 10 year term). Many rank-and-file employees and managers who traded in their underwater options a few years ago for a smaller number of repriced options or restricted stock are likely feeling real regrets. Given the market's rise in the past few years, particularly for tech companies, those earlier options may now be substantially in the money.

Bruce Brumberg
Editor-in-Chief
myStockOptions.com

Who Are Google Options Good For?

Companies do not like executives and employees hedging their stock for various reasons, including the loss of the motivational value if the upside is capped or downside protected, and the insider trading risks if the stock is called away when person knows material nonpublic information. Geoff and others have raised this as potentially additional reason Google's plan may not spread: options loss some of their motivational value to drive stock price higher.

Thus even if this idea has advantages for employee, I doubt companies would permit it compared to just selling/transferring the options. There are also additional tax issues that could cause the selling of call options to be considered a constructive sale and trigger taxation.

Bruce Brumberg
Editor, myStockOptions.com

Who Are Google Options Good For?

Good thinking and writing about this topic at level not seen before on the Google stock option program.

1. When Google says the average lifetime of its options grants to employees is 4 years, do you know whether that is from when each slice vests or the average of all grants regardless of when vest from the grant date (i.e., some grants exercised after one year right after part of it vests)? Does this impact your analysis?

2. Your write: "If Google provides that program in which they ‘allow’ employees to sell the option and the option gets adjusted to a two-year expiration date, Google has just made back the spread between the value of the four-year option and the two-year option. In other words, Google’s bottom line improves every time a Google employee sells an option with an expiration date greater than two years via this program."

Is this only true when the employee sells option that has not lasted (i.e., been outstanding) at least 4 years? If employee sells option that has already gone 4 years, even though more than 2 years left, hasn't Google has taken the full earnings charge for it? Thus the cost of employee compensation would not go down for all employees using this program.

3. As for the first comment at top about the taxes, you may pay more taxes in waiting until later in the term to exercise, however your net gains after taxes will likely be larger than exercising earlier. Stock options with the fixed exercise price have substantial leverage in rising market/stock price.

4. The Google TSO plan makes most sense for employees that were planning to exercise and sell earlier in the term to generate cash for other needs or investments. They can now get more money for the "option" part of their stock options (i.e., extrinsic value). Shortening it to two years is less than if they could sell the options for the value of the full remaining term, as you clearly show, but they do not have that "option" of another approach. The concept of employees getting anything at all for the remaining term, is novel and only used before in a few examples for US companies (i.e., Microsoft and Comcast). I assume the concept will evolve and change over time.

If employees were planning to wait until later in the term to exercise, their net gains will be greater assuming reasonable stock price appreciation just looking at the future face/intrinsic value (see the tools in myStockOptions.com). Employees that had planned to hold onto their vested options to exercise/sell later in term or hold the stock at exercise, assuming they understand the risks if not diversified, will be better off financially not using this program to exercise/sell earlier in term.

Bruce Brumberg, Editor
myStockOptions.com