STOCK OPTIONS Google faces risks in workers' benefiting from IPO

The IPO is likely to generate fabulous wealth -- and management hassles.
SAN JOSE, Calif. (AP) -- Google Inc.'s initial public stock offering next month will instantly transform hundreds of Silicon Valley workers into millionaires, at least on paper.
Google has doled out stock options to virtually all its 2,292 employees. From senior executives to administrative assistants, self-described "Googlers" get options -- which may eventually be sold for cash -- when they start work and when they're promoted.
"I've heard some huge numbers -- even that everyone who works there is going to be a paper millionaire," said Matthew Kelmon, president and head portfolio manager of Palo Alto, Calif.-based Kelmoore Investment Company. "The whole thing brings back memories of the bubble. People probably haven't learned much from history and they'll go out and buy three Ferraris and take out a mortgage on a bigger house."
Like many Silicon Valley companies, Google awards options to employees depending on their start date, negotiating skills, salary and rank in the company; grants vary widely among individuals. But there's no question that Google has been generous.
About the stock options
Google has granted 20.7 million stock options to workers since the end of 2002, sometimes at prices below 49 cents per share, according to a financial document filed Monday. The stock is expected to debut as early as next month between $108 and $135 per share.
Stock options allow the purchase of stock at a discount. Any amount over the option price becomes a profit when the option is exercised and the stock is sold.
According to the Securities and Exchange Commission filing, Google had 26.94 million outstanding stock options held by its employees and consultants, at an average exercise price of $5.21, as of June 30.
If Google shares match the assumed IPO price of $121.50, that adds up to $3.1 billion, to be shared unevenly by fewer than 3,000 people -- an average of more than $1 million each when all their current options are vested.
Potential problems
The prospect of such sudden wealth could create a host of management problems in Google's Mountain View headquarters, hastening turnover and eroding Google's vaunted corporate culture and high productivity, cautioned Thomas Taulli, a lecturer specializing in IPOs at the University of Southern California's Marshall School of Business.
"Even people who are hard workers and dedicated employees will suddenly spend all hours of their life looking at the stock ticker, seeing where the stock price is," Taulli said. "Sudden wealth is a huge management challenge and big distraction."
Big disparities in stock option packages could create rifts between the many newer employees and the elite Googlers who joined soon after the company launched in September 1998.
Veteran employees got the lowest priced options, and many of their grants are fully vested, so they can immediately convert them into cash. Newer employees received options priced at $38 per share or higher and probably can't cash out for years.
Acknowledging risks
About 17.8 million of the options granted to employees and consultants remained unvested as of June 30. Still, Google has acknowledged the potentially grave risks of instant wealth -- even the potential departures of CEO Eric Schmidt and founders Larry Page and Sergey Brin. Page and Brin are fully vested, and Schmidt is almost fully vested.