As far back as 2007 (almost two full years ago!) when a bailout meant borrowing $1,000 from a buddy, the New York Times estimated in an article that “it is estimated that 1,000 people each have more than $5 million worth of Google shares from stock grants and stock options.”  At the time of the article (November 11, 2007) the stock price hovered around $665 per share.  It currently trades at around $575 or a decline of approximately 13.5%, which brings that $5 million down to a paltry $4.3 million.  However, over the last 12 months, the stock dipped to as low as $250 a share so hopefully these same employees got more options at lower prices to help soften the blow.

At the time, there were over 16,000 employees at Google, half of which had worked less than 12 months at the company.  Imagine if you worked at Google as one of the “unfortunate” employees to have options worth only $1 million.  I could see walking the halls with some of these thoughts going through my head;

1. Why are these people still working here?!
2. What possible incentive do any of us have to come into work every day?
3. Does this financial security put the company at risk when any one us us can just “retire” at any time?
4. Was Notorious B.I.G. right; mo’ money, mo’ problems?

I (and I’m sure many others) could also look at this situation in a much different way;

1. I work with “partners” who want me to have skin in the game and are incented to see the entire company succeed.
2. We are in control of our own financial destiny; as the company rises, we rise along with it.
3. My role at this company is a career and not a replaceable job based solely on salary.
4. I will do everything I can to spread the good word of our company to the rest of the world.

I am a big fan of stock option plans and not for the obvious reason that our practice is hired to value the per share common stock values of private companies for the purpose of granting options (IRC 409A).  I am a big fan because strong, professional managers gravitate towards companies that share the upside of growth and prosperity with their employees.  As simple question; would Google be Google if its stock option plan didn’t trickle down to every employee?  Said another way; what makes Google a market leader?  Answer: its people.  I strongly believe that in a hiring situation where a strong candidate has two similar opportunities, he/she will always pick the one with the better stock option plan and not for just for the financial upside but for the simple fact that top management wants its employees to share in its good fortunes.

On the flip side, in the current market environment where struggling firms need professionals with the ability to turn around a difficult situation, the upside (i.e. lower strike prices on options and possibly more actual share grants) is even greater.  Clearly, within the technology industry in San Francisco, Silicon Valley and the South Bay, option grants influence hiring decisions and strong management teams for both quantitative and qualitative reasons.

However, these plans don’t come without risk.  Anyone who has worked at a public company whose stock is going in the wrong direction knows the impact stock price has on employee morale.  It is sometimes the last straw for employees to jump ship (“my options are out of the money anyway”).  These logical responses fueled by simple human nature may lead to high turnover, poor work quality and low efficiency, which can spiral an already bad situation to one beyond repair.  Add in the nebulous nature of private company stock options where exit opportunities aren’t a matter of calling your broker and you can see why some industries don’t employ these plans at all.

Over the next few blogs, I will discuss this topic within a predominantly family run industry that has little to no support for these plans: the wine industry.  With very few public companies and an industry predominantly comprised of multi-generational, family run wineries, these plans may not make sense.  Or do they?