DISQUS

Seth Finkelstein · 2 years ago

"An auction would solve at least that problem, ..."

Umm, there isn't a "problem" at that level - options on Google already have a price in a very liquid market (whether that's the true value is another issue ...). So there's nothing for the auction to solve.

There is the issue that employees couldn't sell those options before, so couldn't get that price. But that's entirely different.

Mathew Ingram · 2 years ago

I beg to differ, Seth. There is a liquid market for Google options -- but not the ones that employees hold, which have a variety of vesting periods, etc. The price of the freely tradeable options is a completely different animal.

Seth Finkelstein · 2 years ago

The options can't be sold until the vest. When they vest, in this program, they are sold as a two-year (or less) option. Two-year options have a public market price. Google's own material refers to the general market, e.g.

" Although Google's TSO program is
intended to mirror the public market, it will not be as efficient
because there will be fewer market participants and slightly higher
transaction costs."

So it's essentially the open market price plus inefficiency and friction.

Mathew Ingram · 2 years ago

I know they can't be sold until they vest. My point was that there's still a time value implicit in the Google employee stock options that is more difficult to price than the tradeable options on the stock exchange, and an auction will help with that.

Seth Finkelstein · 2 years ago

I don't understand. What is difficult to price about the employee stock options *relative* to an ordinary public market two-year option, except for the minor matter of "handling charges" having to do with small lots, paperwork, etc. ?

Isn't it useful to think about this as two-year option plus service fee, with the auction for the lowest service fee? But the service fee auction doesn't tell us anything about how to accurately value the two-year option.

Mathew Ingram · 2 years ago

Okay -- maybe you could explain something for me then. I was under the impression that the whole point of setting up this system was to give Google employees an alternative to exercising their options and selling their shares on the open market. But if they trade their shares to a brokerage firm for something that amounts to the exact same price they would have gotten had they exercised the option and sold it on the open market, then what is the point of having this auction system at all?

Seth Finkelstein · 2 years ago

Ah, your first sentence is right, but the second part, the auction system, doesn't follow.

The purpose of this system is to let employees get the full VALUE of some time premium of OPTIONS. Normally, an ordinary person can't easily get that full value for an employee stock option, because they can't sell it AS A STOCK OPTION. The employee can only, at some point, exercise the option, turn it into stock, and resell the stock. But the option itself has value because of the time-right in it.

More importantly - and Google keeps stressing this point - options can still have value even if they are for more than the current stock price (because of the chance that the stock will be higher in the future).

So Google has a semi-reasonable idea - just let employees sell the *options*. This has a lot of complications - did you read my long blog post about it?

However, the auction itself doesn't do much to value the options outside of the big public market. Nobody is going to pay *more* for an employee option than one for a similar time period they can just buy on the public market with no hassle. So the public value is a strict upper bound. If they want to pay a lot less, there's an arbitrage opportunity for someone else. So all the auction is about is finding the low bidder to handle the business of the employee options, and whatever weird accounting Google is doing here.

Why doesn't Google simply let the employees sell the options on the open market? Good question - I wish I knew the answer. I think it has to do with the way Google is using the program to keep up the stock price. It's got to be some complicated stock/options accounting issue. But that doesn't have anything to do with valuing the options.

Mathew Ingram · 2 years ago

So we agree that the time value inherent in the option is one key ingredient in the system. I'll accept your point that the market value of public options is an upper limit. But I still think the auction is some Google math nerd's idea of a way to crystallize that time value in some way. I did read your post, by the way, but I find it hard to believe that the auction is just some elaborate system to prop up the share price. Of course, I could be wrong.

Seth Finkelstein · 2 years ago

Absolutely, the time-value a huge part of an option. But the auction itself is just to find a low-bidder. Again, if there wasn't some complicated unclear accoutning reason, why *not* just let employees sell the employee options on the public market? When employees exercise the options internally, they don't have a special "stock auction", to have employees sell the stock in a special private market.

Oh, it's not *just* to prop up the share price. It also lets employees take advantage of the likely current mispricing of Google stock options relative to how Google's stock will probably perform over the next few years, at the expense of the suckers who eventually get stuck with the worthless options.