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.