Stock Options as a retention tool

A stock option, according to investopedia, is a privilege sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.

Stock options are used by many companies as a retention tool and is a way to align the interests of the shareholders with the interests of the managers. 

In practice, a stock option with an exercise price of 300$ in three years gives the option to the owner to cash in, if in 3 years the market price of the stock is higher than the exercise price (American options can be exercised anytime between the date of purchase and the expiration date. European options may only be redeemed at the expiration date).

For example, if in 3 years the stock market price is 400$, the owner can use the option to buy shares at 300$ (the exercise price) and sell them back at 400$ (market price). With an immediate gain of 100$.

What happens when the company shares fall below the exercise price? The stock options have no value and do not serve, among other things, as a retention tool.

TechCrunch, has a nice article on Google, Google Employees Watch In Horror As 60 Percent Of Their Stock Options Drown.  In the last 6 months, the stock went from around 600$ to 300$. 



According to TechCrunch, Google grants stock options to employees during the week they are hired. The last time the stock was this low was almost exactly three years ago. So anyone hired since October, 2005 is pretty much under water. That is 75 percent of all current employees (Google had 5,000 employees three years ago, and now has about 20,000).

However, as remarked in the article, if the economy truly is spiraling into a recession and capital is drying up for new startups, frustrated employees might not have anywhere else to go. And Google is facing the same difficulties the other companies are having.

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