Updated: Google’s Transferable Stock Option Program Begins

Google has submitted filings (prospectus plus supplement) about its initial test of its transferable stock option (TSO) program. The idea, you’ll recall, is to give employees with vested stock options a new alternative with respect to making money from vested options.

A quick refresher: Rather than non-executive Google employees either exercising the options and selling at the current trading price (net the exercise price), or holding them and hoping for higher prices later, employees will be able to sell the vested options on a new secondary market created by Morgan Stanley. Among many other things, this would attach a value to vested options, even vested options having grant prices above the current trading price.

I have said previously that I like the innovative thinking, but I’m not yet convinced of the program. Two issues:

  1. Where is the transparency? I have yet to see how outsiders get a window into this internal option market. I see how it’s informationally good for Morgan Stanley and for participating institutions, but how do the rest of us get a window into the option flow data?
  2. I see how this is good for Google employees, as well as for management in increasing the perceived value of options used in hiring engineers, etc., but I have yet to be convinced that it sufficiently aligns interests with run-of-the-mill investors. The idea behind grant prices, vesting, and exercisable options is to keep investors and employees’ interests aligned. If Google employees can now make more money from options, and that doesn’t imply an increase in shareholder value, which this doesn’t, I’m uneasy.

More here via Michelle at Footnoted.

[Update] Roger Ehrenberg has an incisive comment to this post taking issue with at least one of concerns. We still don’t totally agree on my first concern above, but his argument on my second issue is a good one, so let’s downgrade that concern to a wash, at least for new Google employees.


  1. As I said earlier, check me on this:
    Exercised employee options turn into stock. Which dilutes the stock. Which send prices down. Which leads to people exercising more options while they’re worth anything . Which further sends the stock down …
    But if they can resell the options, to someone else, the party continues that much longer. ..
    Options finance experts:
    Is my cynicism correct?

  2. Paul, as you may know, I wrote about Google’s option program back in December (http://www.informationarbitrage.com/2006/12/google_and_cita.html). In it I discussed the pros and cons of the program, but basically came down in the “pro” camp.
    Concerning you questions/issues, I get your point on (1) but over-the counter derivatives transactions are just that, over the counter, and they happen every day as a part of prudent capital structure management. There is plenty of options information available on Google from the public markets, so I’m not really sure I view this is as a gating factor in viewing this program as positive. With respect to (2), IMHO you are missing the boat. This DOES create value – potentially significant value – for run-of-the-mill Google shareholders, by giving Management the currency to further incentivize top talent to join even in light of the stratospheric increase in stock price. And make no mistake, this was a BIG problem suffered by our friends at Microsoft (not to mention Intel) after they saw their market caps approach $600 billion and subsequently drop. By enabling employees to extract a measure of time value while preserving upside, you are creating an additional lever which Management can use to attract and retain the best-and-brightest. If I was a Google shareholder (which I am not), I would view this as a win.
    Seth, sorry, but your analysis and earlier post are simply wrong. On both counts. Exercising stock options does NOT drive stock price down. Analysts (not to mention GAAP) utilize this concept called the Treasury Stock Method adjustment, which converts the in-the-moneyness of stock options and puts them in the denominator of the EPS calculation, ergo, the dilution associated with the rising stock price is already baked into EPS. And analysts who don’t make these adjustments from a valuation perspective are simply idiots and should not be analysts. But to be clear, most do. Concerning your ongoing party metahpor, you have made the significant (and unlikely) assumption that employees view their choices at a point in time as being either (a) sell my option today and collect my in-the-moneyness and the lesser of (two years or the remaining life of the option) of time value (which is the deal Google agreed to with Morgan Stanley), while the option lives on in the hands of Morgan Stanley or (b) simply exercise the option. This will NEVER be the decision. Why? Because (a) will ALWAYS be worth more than (b). The choice is either (a) above or (b) exercise the option at a later date, because I don’t need the money and continue to be bullish on Google’s stock price. So the Morgan Stanley arrangement will NOT result in an extended option life. Fact.
    I hope this helps.

  3. Roger, thanks at least for reading my post and responding. My basic question is this: Why all the rigmarole with an internal market and not allowing the institutional buyer to resell the options? Why not just make the options transferable, sell-able on the public market, and be done with it? That is, what’s going on here, in terms of why this is structured so weirdly?
    The only thing I can come up with, is that there’s some stock-options accounting reason, which I’m trying to fathom.

  4. Seth, I wish you had read my first post, written around the same time as yours, as it was clearly not a gush by any means. In fact, I thought it was pretty balanced.
    That said, you just raised THE key question: why aren’t employee stock options transferable? Neither the SEC nor the IRS will permit this. The fact that the SEC signed-off on the Google structure is practically tectonic from a regulatory perspective. Microsoft and others looked into this issue back in the 1990s, and the SEC was not supportive of such a change. Ergo, the Google structure as a mid-point compromise between full transferability and the status quo.
    That all said, for the reasons mentioned in my recent post (and in light of the caveats of my December post), I think the Google TSO structure is a well-constructed compromise that benefits both Google employees and Google shareholders, with little to no sinister undertones.
    Thanks for the comment, Seth.

  5. This is just a cheaper way of making stock grants by exploiting a taxation loophole.

  6. John Olagues says:

    The Google transferables is an idea that some Morgan broker thought up to make some profits for these so called institutions and itself. There are no benefits to Google and just slight benefits for the grantees.
    If Google wants to allow their employees to capture the “time premium”, there are better ways. One simple was is for employees to write listed calls and capture more time premium than selling to Morgan institutions. The institutions will be hedging by shorting stock or selling the listed calls that the Google employees should sell. They do not even have to be vested and they will not pay a tax when the sale(write)is made.
    There is another way to capture the time premium which is far superior to the Morgan/Google plan. I will not discuss in this comment.
    In summary, unless I am vastly overestimating the intelligence of Google employees, the employees will not be taken for this ride.
    John Olagues
    P.S. I personally traded an average of 3000 contracts per day for ten years as a member of the CBOE and the PSE and am not jiving you.

  7. Question: Will this increase the amount of options employees take and therefor affect the stock price?