Learning to Swim Underwater: Employee Stock Options and the Tough Economy

Jan 5

Do you remember the first time you swam underwater? Did you hold your nose? Squeeze your eyes shut? Take a big gulp of air and dunk your head? Pop up in a second gasping, thinking you’d been under for a whole minute? Well, hold your breath a little longer. A lot longer. You’re going to be underwater for a year.

The tidal wave came in as the value of stocks declined. Employee stock options have been deluged. They’re underwater — that is, the grant price of their shares is higher than the current stock price. In fact, Silicon Valley Reporter says “more than 80% of Silicon Valley’s 150 largest publicly traded companies have employees holding underwater options.” And it’s not just tech companies. CFO Magazine reports that “close to 100 percent of Fortune 500 CEOs’ stock options are underwater” as of the first of the year. That means millions of employee options are underwater, too.

It’s getting worse. Heck, more than one-third of Google employees have underwater options. The S&P 500 had its worst year since 1937, down over 38%. And 2009 doesn’t look like it’s going to be any better. We’re in a deep recession and the water is rising higher above the price of employee stock options.

Yet, with all the tumult and economic strife, we need good employees to stay. We need them to focus on profitability. And we need their attention. One big element: Stock option repricing. That gets their head above water.

A number of companies are repricing their employee stock options — and many more will in 2009-2010. Repricing or exchanging underwater employee stock options isn’t easy. Companies rely on experts to help with the technical details. And gaining shareholder support is no small feat. But once an acceptable structure is worked out, how do you communicate the exchange to employees?

At the start of an exchange, you have to ask for options back in exchange for new ones. Often, that means exchanging a bunch of options for far fewer. Employees are skeptical. There are exchange ratios. Official Tender Offer documents. A limited time to make crucial decisions. Employees want to know what’s up.

Coming Next: Developing a Communication Strategy for Underwater Stock Options

About the Author

Frank Roche

Frank started IFRACTAL over 7 years ago with Sarah Chambers. Together, they've created HR communications and HR software for some of the world's leading companies. Frank is also studying Flamenco guitar and origami.