Wednesday, December 13, 2006

Google Stock Options

It looks like there's a change in the way that Google is going to account for stock options for its employees. However, it is only an accounting change, it doesn't actually change any of the costs to the company:

"It could give Google a slight advantage in recruiting people," said James Glassman, a financial columnist and fellow at the American Enterprise Institute in Washington D.C. "It has no real effect on the company's finances. It is an accounting change. The impact is all on the human resources side."

That's actually a little difficult to understand given this:

The Web search leader said it expects to start the transferable stock option program in April 2007 and will take an undisclosed charge to reflect the greater value of company options under the new scheme.

Transferable options have two advantages over other means of motivating and retaining employees: They combine the leverage of options -- their initial value can multiply over time -- with the ability to understand the tangible value one gets in holding a tradable stock, experts in the field said.

Hopw can something require a charge for higher costs and still be just an accounting change?

Ah, here it is:

"It seems to be a rather clean effort at introducing a form of liquidity that benefits shareholders and employees alike, without any attempt to generate an accounting treatment that would cause raised eyebrows at the SEC," he said via e-mail.


Google said financial service providers might buy the options as a hedge to other investments. However, the term of the options will be cut to two years, or less, once transferred into the program, instead of the normal 10-year expiry.

OK, so the employee can sell the option, when it's vested, without having to wait to the end of the full term of the option when it is actually transferred into stock. That's actually a very good idea indeed. One thing it does do is mean that out of the money options will in fact have a (however small) sales value, as they'll still have a time value.

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