The NASPP Blog

I was surprised to see that Google announced in an 8-K last week that they are implementing an option exchange program for their underwater stock options.  I was even more surprised to read how the program will work. 

What About the TSO Program?

What surprised me most about the exchange program was that Google feels the need to do it at all.  You will recall that one of the major headlines of 2007 was Google’s transferable options program, which enables Google employees to sell their options to a third party, rather than exercising them.  One of the touted benefits of the program was that it should make underwater options less of a concern for Google.  Even underwater options have time value, thus, Google employees would still be able to realize a return by selling through the TSO program even when their options have no intrinsic value.

Does the exchange program mean that Google employees haven’t been able to sell their underwater options through the TSO program, or is it just that they weren’t making enough money on their sales? According to Google’s September 2008 10-Q, options covering almost 500,000 shares were sold through the program in Q3, but the 10-Q doesn’t say whether those options were underwater or in-the-money.  It does say that the options sold at an average of about $276 per share (a premium of about $38 per share).   

Is This 1998 Again?

I was also surprised to see Google offering to exchange the options on a one-for-one basis–something I haven’t seen much of since FASB announced variable-plan accounting for repricings under APB 25, back in 1998 (yeesh, has it really been ten years since the halcyon days of cost-free repricings?). For most public companies, this would never get past their shareholders, but Google isn’t submitting the exchange program to a shareholder vote (their plan expressly allows repricing without shareholder approval).  Even if they did, it wouldn’t matter: according to their last proxy statement (March 2008), their officers and directors hold 70% of the votes on their common stock, which gives them the luxury of being able to do things with their stock plan that other, more widely held companies with institutional investors, can’t. 

If your management team is thinking that they can do this type of exchange just because Google did it, they might need to think again (I’m guessing that not many of you work for companies where management controls a majority of votes).

Eligible Options

Another feature of the program that is surprising to me is that Google is repricing all options with a price above FMV on the day before the exchange, rather than requiring that options be a minimal percentage underwater to be eligible for exchange.  The last company I know that did this saw their FMV rise on the date of the exchange and some employees that participated ended up with options that had a higher exercise price that the ones they exchanged–not at all the intended outcome.

Compared to Starbucks

Starbucks also announced an exchange program last week, but their program is a lot more like what I expect to see in exchange programs these days:  only options with a price above the 52-week high are eligible, options will be exchanged on a less than one-for-one basis (Starbucks is hoping to achieve the elusive value-for-value exchange), executive officers are excluded, and the program is subject to shareholder approval (probably the reason why the program is more like what I’d expect).

Reason #10 to Renew Your NASPP Membership:  The Latest Information on Underwater Options

Visit our Underwater Options Portal for the latest strategies on dealing with underwater stock options, including a recent memo from ISS on key features institutional shareholders consider when evaluating exchange programs.  And don’t miss our webcast, “The Dark Side of Option Exchanges,” coming up this Thursday, January 29.

Submit Your Proposal for the 2009 NASPP Conference Now

We are accepting speaking proposals for the 2009 NASPP Conference through February 27.  For more information, visit our Proposal Submission Website.  We begin evaluating proposals as soon as the submission period ends, so we can’t make any exceptions to this deadline, no matter how dire the circumstances. Plan accordingly! 

We have not yet announced where the Conference will be or the exact dates.  Rest assured it will be in the continental US, in the October timeframe. As soon as we know more, I promise to announce it here in my blog.

In Case You Are Wondering…

Rachel Murillo, the NASPP’s Editorial Director, gave birth to a boy, Dylan Matazas Murillo, at 6:24 AM last Wednesday, January 21.  7 lbs 6 oz and 21 inches long. Both Rachel and Dylan are doing great.    

NASPP “To Do” List

We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blogs. 

• Renew your NASPP membership for 2009 (if you aren’t an NASPP member, join today).  
• Don’t miss this Thursday’s webcast, “The Dark Side of Option Exchanges.” 
• Register for the NASPP’s newest online course “Tackling Equity Compensation Issues Related to Mergers & Acquisitions.” Don’t wait–the price goes up after February 6.
• Send that Section 16 question you’ve always wondered about to adye@section16.net so that Alan Dye can answer it during his upcoming annual webcast on Section 16. No need to be shy–all questions are treated confidentially!

– Barbara