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Paper paupers: Stock slumps have made options worthless

by Jessica Guynn

Knight Ridder Newspapers

In June, Peter Economos, a 28-year-old business-development manager at Intraware, played the round of his life on the Kapalua golf course, topping his best score by six strokes.

"I broke 80 for the first time," Economos said. "It's just such a natural high to shoot a score like that."

At that giddy moment above the shores of Maui, Economos realized that for him the grass was greener on the golf course than in Silicon Valley. He confided to his wife Tanya that one day he might just cash in his stock options to fund his fanciful dream of trying to turn pro and join the PGA Tour.

That day could be a long way off. It has been a tough year for Intraware's stock, which has lost more than 90 percent of its value from its 52-week high of $99, dropping to about $8 a share.

One year ago when Linda Sigler, 49, a legal assistant, traded in her job at a big San Francisco law firm for one at an online mortgage company closer to her Concord, Calif., home, she looked forward to putting billable-hour requirements and a high-stress work environment behind her. She also fantasized that her stock options in would help her retire early.

Those fantasies went bust as she watched the San Ramon, Calif.-based company's stock sink to an all-time low, most days trading below $1 a share. Her options, priced at $4.31 a share, were worthless.

"To get stock options and have them start vesting and then have them not be worth anything was very disappointing," said Sigler, a senior corporate legal assistant and corporate secretary at

But today, Economos and Sigler are both a few more options closer to their dreams.

In May, when Intraware's stock was in the $15 to $17 range, Chief Executive Peter Jackson and the Intraware board issued supplemental options to employees, with the number based on the individual employee's strike price.

"The company came back to us and said, `We value you as an employee. We recognize you could go other places, but we want you to stay and contribute to the company so we are going to issue more stock as another incentive,' " Economos said. "That inspires me every day, not only financially. It's a good feeling to know a company is behind its employees."

Also in May, Chief Executive Rick Cossano and the FiNet board issued additional stock options to employees at 80 cents apiece.

"It was a nice gesture to boost morale," Sigler said. "Rick and the board of the directors felt it was important for employees to feel like the company was behind them. They realized people were disappointed." These days, many workers have gotten a crash course in stock options. The number of paper paupers is growing. One-fourth of the 548 companies that went public in 1999 ended the year trading below their initial offering prices, according to Hoover's IPO Central.

Stock options used to be the coin of the realm. High-tech companies routinely offered them as a major part of compensation packages.

-- Carl Jenkins (, October 02, 2000


here's the rest of story and a link:

For a while, stock options seemed to have limitless potential. When a company's stock price rose, employees made money, sometimes a lot of it - at least on paper.

Unfortunately, ever since the technology sector began to slump in April, many of those very same options have lost all their value. It's a troubling trend that has affected everyone from software engineers to top executives. Notable Old Economy executives who jumped on the options bandwagon have jumped back off.

Joseph Galli left Black & Decker to join as its president for 3.9 million options, but spent just 13 months with the company before leaving in July as the stock cratered.

A year ago, George Shaheen left Andersen Consulting to lead Webvan Group and got a signing bonus of 15 million options. The stock, with a 52-week high of $34, has since sunk into the $3 range.

Options allow their holders to buy stock at the market price on the day the options are granted. The options can be exercised over time, a process called vesting.

As many as 10 million employees receive stock options, up from 1 million in 1992, according to the National Center for Employee Ownership, a nonprofit group in Oakland.

For many technology companies, especially dot-coms, the stock-options party is over. Stock prices have crashed, the initial-public-offering market has had a few too many and the Nasdaq has a bear of a headache. And technology companies that embraced stock options as a way to recruit and retain the best and the brightest when they were flying high are suffering some unintended consequences as their stock prices come back down to Earth.

Rival companies with higher stock prices or the prospect of a potentially lucrative initial public offering or traditional companies with longer track records and the promise of more secure employment are cherry-picking workers.

Some executives and employees are consulting lawyers in an effort to recoup thousands and sometimes millions of dollars they say they have lost on paper.

And it now takes a lot more than stock options to recruit new workers. Many job candidates are no longer willing to accept lower salaries in exchange for stock-option grants and are demanding competitive salaries and bonuses.

Therein lies the danger in creating an options culture that too closely links employee morale to a company's stock price, pay experts say.

"Companies whose stock has been hit really hard have a real dilemma on their hands," said Jon Holman, a San Francisco executive recruiter. "Those huge unvested options used to lock people in. Not anymore. I wouldn't want to be the CEO of a technology company whose stock is trading below the initial-public-offering price."

So some of these companies are going on the offensive to keep their human capital, issuing new grants to employees whose options are "underwater," meaning they are priced higher than the company's stock is trading.

And sometimes issuing new options grants once isn't enough.

Now that Intraware's stock has been trading at or below $7 since the end of July, Jackson says he is considering issuing additional options to employees again.

-- Carl Jenkins (, October 02, 2000.

In the volatile technology sector where huge fluctuations in a company's stock price are common, the value of employees' options can vary widely.

Companies whose employees' stock options have little or no value have two alternatives: Reprice the old options or issue new ones.

Repricing means the company cancels the old options and issues an equal number of new ones at the current market price. This practice has become increasingly rare since March, when a new accounting rule was adopted that requires any gains on repriced options to be treated as an expense and counted against earnings. Issuing new options has become a far more popular course of action. Making new grants at today's lower prices is essentially an end-run around the penalties for repricing.

The dilution of ownership, while not popular with investors, especially in companies that give options to virtually every employee, is better than taking the charge against earnings that comes from repricing, high-tech executives say.

The practice got publicity in April when Microsoft made a special award of 70 million options to its 34,000 employees at $66.63 a share. Options employees had received the previous July were in the low $90s.

"Granting more options has become increasingly common, especially with the tight job market," said Joe Maglione with Deloitte & Touche in San Jose. "If you have an employee sitting there and the stock has got to go up 20 bucks a share before he's going to break even again and he has an offer from some start-up company across the street, you've got a problem. There is a band of employees hired in the last year or so when the market was doing phenomenally well who are in that situation.

"The employees with options the most underwater are those employees who have the least amount of loyalty to your company because they haven't been there as long."

Cementing employee loyalty at a time when a company is trying to boost its stock price is critical.

Cossano didn't hesitate to grant more options to employees when he took over as CEO of in February.

When needed them the most, the company was having a hard time holding on to workers whose options were "way out of the money" and whose strike price was anywhere from $3 to $5 a share, he said.

Issuing more option grants "went over extremely well," Cossano said. "It was a great morale booster."

Experts caution that supplemental options should only be granted when the old options are so worthless that employees have lost confidence in the company. They also recommend that the grants be made over time so not all options are pegged to current market prices.

"You do have to make sure that you don't just continually react to the stock price," Jackson said. "You have to balance what is motivational to employees and what is in the best interests of the shareholders and make sure you are being fair to everybody."

Of course, options aren't everything, employees say.

They insist stock options are just one of the many reasons they signed on with their employers.

Sigler says she always thought of her stock options like lottery tickets, just a chance at winning big.

"For me, it's lagniappe," said the Louisiana native, using the Cajun term that means "a little something extra."

She's just hoping that little something will be worth a whole lot of something someday. bin/WebObjects/SeattleTimes.woa/wa/gotoArticle? zsection_id=268448455&text_only=0&slug=stockoptions01&document_id=1342 36216

-- Carl Jenkins (, October 02, 2000.

A friend's son, who last year boasted that he was going to retire early on his company stock options, is now holding millions of shares of worthless paper in his high tech company.

-- Uncle Fred (, October 02, 2000.

Thanks, Carl. A tell-all story with the man-in-the-street details that most articles are unable to offer.


-- (nuts@upina.cellrelaytower), October 02, 2000.

Aren't employee stock options the new version of what they call golden handcuffs?

-- QMan (, October 02, 2000.

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