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December 13, 2006


Paul Kedrosky

Hey Don --

Contrary to your post above, I didn't suggest Google has a hidden agenda. Matter of fact, I think it is creative thinking by Google.

My interest, for the most part, had to with signals to capital markets, privileged access to information, and so on. Where, for example, do I get to see bids, offers, and volume on this institutionally-run internal option exchange? I want that data, and do not want it be Morgan Stanley only that gets to watch the orders fly by.


Don Dodge

Paul, I understand your issue on transparency, but it was probably far worse in the past.

My experience is as an employee and stock owner of several start-ups that went pulic. The way it worked then was that employees and insiders were encouraged to sell their stock ONLY through the original underwriter, say for example, Morgan Stanley.

Most employees opened accounts with the original underwriter and sold all their stock through them. The underwriter was in a position to "manage" the flow of stock and maintain an "orderly" market.

In effect they could match buyers and sellers internal to the brokerage house, move big blocks of stock without causing a ripple on the overall market, and manage the timing of stock sales to avoid wide swings in the price.

All the major underwriters did this back in the day when IPOs were hot.

I agree that Google's TSO plan could possibly allow the big institutional brokerages to arbitrage certain stock movements, but the SEC and other regulatory agencies are watching this stuff like a hawk. No one wants to get caught in a "back dating options" trap or anything like it. So, I think the risk is small.

Seth Finkelstein

Don, the "evil" was a rhetorical question, in the sense of asking who was getting the best deal here. I acknowledge the general market argument. But I think analysis should go deeper into the ramifications of the move on Google's particular situation. Stock options are such a complex and contentious topic, and can have many destabilizing and unintended effects (e.g. who would have thought that receiving/exercising stock options would lead to the "tax trap"? Backdating scandals? Expense accounting controversies?). So I'd say the implications are worhy of exploration.

John Olagues

There are several issues with the program:

a) Will the option, once sold, still carry the possibility that the employee may terminate early and have the expiration date accelarated or will the options maintain the full term?

b) Doesn't the transferability reduce the mutual alignment of employee to employer? Would not that somewhat undermine the purpose of the options grant?

c) How much of an advantage will the employee get by selling and receiving the intrinsic value plus some "time premium" relative to what he can achieve by presently "writing" listed calls to hedge the options against ESOs and long stock?

d) Who will be able to trade the options with the employees?

e) The options are not now allowed to be used as collateral for hedging purposes now? Will the options once purchased be good collateral for hedging by the purchasers?

I think it offers some exciting posibilities for traders especially if the terms of the options become standardized.

To make this work, Google would have to do a good bit of work in designing the options to make them salable.

Julie Brown

You say:
> Some of your options will vest in November 2007
> and expire in November 2009.

Google options, like Microsoft options, expire in 10 years, so options that initially vest in Nov. 2007 (and fully vest in Nov. 2010) wouldn't expire until 2016.

As a side note, you didn't mention all that much about the reasoning behind the move. I forget whether it was Sergey or Larry who best summed it up: "the SEC says we have to account for these options as a business expense of $100 or more each. If I'm going to be charged $100 each, then I'm going to make sure they're actually worth that much to my employees!"

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