Google has announced a Transferable Stock Options plan for Google employee stock options. The plan allows employees to sell their vested stock options to the highest bidder, a process managed by Morgan Stanley.
In the tech world it is very common for employees to have stock options. There have always been two ways to handle vested options. You could exercise the options when they vest, sell the stock, and pocket the difference between the option strike price and the current market price. Or, you could continue to hold the option after it vests, sometimes up to 5 years, hoping for a higher price, and delaying the capital gains impact.
This new Google TSO program allows employees to squeeze a little extra value out of their employee stock options. There is still "time premium" left in the vested stock option because the options typically do not expire for several years after they vest. Institutional investors are willing to pay money for that "time premium" left in the option.
Google provided its employees with an example of how this might work. I will paraphrase it here. Tom and Sally each have vested options for 100 shares at a strike price of $400. Assume the current market price is $500. Tom takes the traditional path by exercising his $400 options and selling the stock for $500, making $10,000, less capital gains taxes. Sally is smarter than Tom...she checks the employee web site to see what other financial institutions are willing to pay for her 100 options. An institution is willing to pay $150 for her 100 options, netting her $15,000, before taxes.
UPDATE: The real value in this program is for "under water" options. Employees who joined Google last month when the stock was $513 per share are now $35 per share under water and thinking maybe this wasn't such a smart move. Think again. Some of your options will vest in November 2007 and expire in November 2009. The value of that "under-water" option today is somewhat over $90. For more detail on why "under water" options are worth a lot of money see my other post here.
This is a win/win/win for employees, Google, and the brokerage houses. The employee optimizes the value of their options. Google avoids an avalanche of employee vested stock options hitting the market all at once. The brokerage houses get a little better deal on Google options than on the open market.
There are pundits who see evil and perhaps a hidden agenda in anything an industry leader tries to do. As anyone from Microsoft will tell you...it goes with the territory. Sorry guys, but I don't see any evil here...just creative and innovative thinking, putting employees interests first.
Microsoft is a great company to work for...always putting employees first. Microsoft has the best health insurance program in the world. Employees pay nothing...no employee contribution, no co-pays, no deductibles. It is awesome.
Microsoft also gives employees stock grants every year. Stock grants are outright grants of stock with no "strike price", just a vesting period. For example, an employee might receive a 1,000 share stock grant every year that vests over 5 years. At the end of the first year the employee vests 20% or and is given 200 shares free...no strike price to pay. The employee also gets another stock grant, based on performance, that vests over 5 years. At the end of the second year the employee gets two stock grants, 200 from the first year and another 200 from the second year, plus a new stock grant, again based on performance. Needless to say, by the end of the 5th year the Microsoft employee is doing very well.
Employee compensation is very competitive in this market. Microsoft and Google are constantly raising the bar. Competition always brings out the best, generating lots of good choices.