Google lets staff auction stock options

Google plans to start an unorthodox stock options programme in April that will allow employees to sell their vested options in an online auction, the search giant announced late on Tuesday.

Traditionally, employees have two ways to deal with stock options: exercise (take ownership) of them once they have 'vested' and sell them at the current trading price, and pay back the company for their so-called strike price (that's typically the trading price the day the options were granted), or hold on to them after exercising them.

This new, Transferable Stock Option programme gives nonexecutive Google employees a third option: a secondary market of sorts managed by Morgan Stanley where preapproved financial institutions can bid on vested options. It doesn't apply to options granted prior to the search giant's initial public offering.

For employees who have arrived at Google long after its stock price started to climb, the auction potentially presents a more profitable alternative to trading on the public markets. It would work like this: once an employee's options are vested, he or she can look for bidders in the private auction. A financial institution may offer the employee, for example, $150 per option. If the employee's strike price was $400 and the stock was trading at $500, the employee would have made $50 more per option going the auction route rather than selling them on the public market. Employees can also set a minimum price at which to sell.

Google execs believe big buyers of Google options on the public markets may see this as a place to bargain hunt. But the financial institution buying that option assumes a risk: mainly, that Google's stock will keep going up. To hedge their bets, financial institutions may 'short' the stock, usually a complicated, three-way transaction where the short-seller makes money when a company's stock price goes down.

So why is Google doing this? Executives say it's to make things fair for newer employees. The company's stock closed trading Tuesday at $481.78 and, despite its long upward climb, some justifiably wonder how high the stock price can go and whether the options for newer employees will be worth anything when they vest. Google's employee stock options vest after four years and typically expire after 10 years.

Dave Rolefson, equity and executive compensation manager at Google, said: "Our expectation is that banks would be willing to pay employees a premium for the right to continue holding the stock."

Elinor Mills writes for CNET News.com.