December 14, 2006

Gooptions As Case Study Of The Failure Of Journalism (MSM Or "Citizen")

The Google Employee Stock Options coverage has been a case study in uncritical thinking. I know, what else is new, but I'll say it anyway.

About the best other criticism I've found is an excellent post on SearchViews, doing time-value calculations, about the aspect of that the plan dramatically shortens the time of the option when the employee sells it.

Initially hailed as an innovative HR strategy, then called "good for investors", the option plan has received so much praise that Internet Outsider asks, "If anyone has figured out the drawbacks of Google's new transferable option plan, please weigh in, because at first glance it looks like a win all around." Though numerous 'draw backs' have been suggested, including "an employee rush for exits", "shareholder dilution" and "arrogance", I'm surprised that no one has pointed out the most important nugget from plan's fine print: [detailed calculation]

But it's almost all been echoing of Google's announcement, or confusion over what the "transfer"/sale system does - and what it does not do. For example, there is no innovation here in determining the value of a Google stock price option. There's already a big public market in trading such options. The auction is basically just to determine who is the low bidder for handling the employee option transaction, given there's some weird constraints in the process. Which bring me to one simple example, in discussing the program, where what should be grist for serious reporting has apparently passed unnoticed:

Institutional buyers, who will be invited by Google to participate, will not be able to resell the employee stock options.

No offense meant to any reporter, but what in the world does this sentence MEAN? That is, it should be a big red flag that something strange is going on. Options on a stock are bought and sold all the time. How is the institutional buyer intended to distinguish from "the employee stock options" and "the stock options bought from yesterday's sheep-shearing"?

And this connects to the earlier issue of why not just let employees sell their stock options on the open market? After thinking about it for a while, I *suspect* this has to with the connection between the options and the underlying stock, maybe that if employee options were released into the open market, they would have to be covered by the company issuing stock (or something similar). But if they're just "transfered" to an institution, they still exist in accounting format as options, so certain negative effects (from Google's point of view) are avoided.

Wouldn't you like to know what this is all about? I would. I'm sure there's a professor of finance out there somewhere, who could explain it all. And might even be *blogging* - to an audience of a few hundred people. But they definitely haven't been found by the big echo chambers. And if that person ever did receive a little attention, the blog-evangelists would shout from their hilltops, the bogosphere triumphs - there's a specialist somewhere on the planet, so "overall" - not counting the endless hype reverberating from the massive audience "blogs", and also discounting that "old media" includes small trade newsletters too - blogs win!

I really think it says something profound about the failure of journalism in terms of civic structure, that random unpaid volunteers are supposed to provide the work that isn't supported otherwise.

STEWART: ... it's not so much that it's bad, as it's hurting America.

STEWART: You're on CNN. The show that leads into me is puppets making crank phone calls.

[Update: Changed title from earlier version - share the blame]

By Seth Finkelstein | posted in google , journo | on December 14, 2006 11:59 PM (Infothought permalink)
Seth Finkelstein's Infothought blog (Wikipedia, Google, censorware, and an inside view of net-politics) - Syndicate site (subscribe, RSS)

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This is clearly also for someone smarter and more knowledgeable than me to figure out, but does Google benefit by creating a clearer and more consistent valuation of stock option grants for GAAP expense purposes? Particularly if the transaction changes the exercise date and thereby lowers the option value, Google may be able to reduce their "on paper" expense line for employee comp.

The lack of transferability of the employee options does not strike me as a big issue for major financial institutions. It is easy for them to buy or sell 'normal' market options in such a way that effectively transfers the employee options (i.e., covers the option to buy perfectly with an option to sell), while saving Google the paperwork of trying to figure out who owns any given options contract.

Posted by: Andy at December 15, 2006 12:19 PM

Now that Time has declared 'You" as the Person of the Year, the wisdom of the crowds is obviously correct and the crowds say Google is fab.

Well no, Time has a pretty good track record of picking people past their peak.

Now there's an opportunity.

Posted by: tqft at December 16, 2006 11:36 PM