Google provides options on its options
Sometimes I think that Google has a bunch of pissed-off ex-securities lawyers on staff whose sole job it is to screw around with things and come up with ideas that make Wall Street mad, or confused, or both. They haven’t been that busy since the IPO (Hey, let’s do a Dutch auction! And then not give quarterly estimates!) but they’ve come up with another doozy: why not create an online auction and let employees trade their stock options? Well, why not indeed.
According to Google, the idea is designed to allow employees to see some benefit from their options before they actually vest and can be sold on the open market. For example, if the stock price looks like it is going down and the value of those options is also going to decrease, an auction of tradeable options would give employees the ability to lock in a particular price. This is part of the reason why people like my friend Paul Kedrosky think that the idea is a bearish signal for the stock (he also thinks there isn’t enough transparency).
Bearish signal or not, I think it’s a great idea. One of the difficult issues with stock options — apart from the fact that companies hand them out like candy and then allow executives to reprice and extend them at will, which I’ve discussed here — is arriving at a value for them. Since they only really have value in the future when they are exerciseable, it takes a fair bit of hoop-jumping to arrive at a current value, which quite quickly gets into Black-Scholes pricing theory, etc.
An auction would solve at least that problem, although it’s likely that ways could be found to “game” such a process. But I think it has benefits for employees and also for Google, which could theoretically waste less on the options it does hand out. As the NYT story points out, Microsoft and other companies have done one-off options-buying programs, but this would be the first permanent process inside a company. Don Dodge says he thinks it’s a win-win-win.
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Umm, there isn't a "problem" at that level - options on Google already have a price in a very liquid market (whether that's the true value is another issue ...). So there's nothing for the auction to solve.
There is the issue that employees couldn't sell those options before, so couldn't get that price. But that's entirely different.
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" Although Google's TSO program is
intended to mirror the public market, it will not be as efficient
because there will be fewer market participants and slightly higher
transaction costs."
So it's essentially the open market price plus inefficiency and friction.
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Isn't it useful to think about this as two-year option plus service fee, with the auction for the lowest service fee? But the service fee auction doesn't tell us anything about how to accurately value the two-year option.
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The purpose of this system is to let employees get the full VALUE of some time premium of OPTIONS. Normally, an ordinary person can't easily get that full value for an employee stock option, because they can't sell it AS A STOCK OPTION. The employee can only, at some point, exercise the option, turn it into stock, and resell the stock. But the option itself has value because of the time-right in it.
More importantly - and Google keeps stressing this point - options can still have value even if they are for more than the current stock price (because of the chance that the stock will be higher in the future).
So Google has a semi-reasonable idea - just let employees sell the *options*. This has a lot of complications - did you read my long blog post about it?
However, the auction itself doesn't do much to value the options outside of the big public market. Nobody is going to pay *more* for an employee option than one for a similar time period they can just buy on the public market with no hassle. So the public value is a strict upper bound. If they want to pay a lot less, there's an arbitrage opportunity for someone else. So all the auction is about is finding the low bidder to handle the business of the employee options, and whatever weird accounting Google is doing here.
Why doesn't Google simply let the employees sell the options on the open market? Good question - I wish I knew the answer. I think it has to do with the way Google is using the program to keep up the stock price. It's got to be some complicated stock/options accounting issue. But that doesn't have anything to do with valuing the options.
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Oh, it's not *just* to prop up the share price. It also lets employees take advantage of the likely current mispricing of Google stock options relative to how Google's stock will probably perform over the next few years, at the expense of the suckers who eventually get stuck with the worthless options.
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