Stock Options and Honey, I Bought You a Car!
I recently saw a stock option agreement that allowed the company to repurchase vested and exercised shares whenever they wished. This is counter to the basic premise of stock options. Options are based on the idea that if someone works for your company long enough, and are willing to take the risk of purchasing the stock underlying their option, they get to keep the stock. So, I wrote a little story to provide some color to the problems with this idea.
The couple had been married for several years. They had created a gifting game and every few years one or the other of them would buy an extravagant gift that truly meant something to the other. The gift was always something the other truly wanted and would value for years. The cost was always enough that both of them knew it took sacrifices. The gift was always focused only on the desires of the recipient.
This year she walked out the front door to see a beautiful new car sat in the driveway. Even for their gift game, this was over the top. He just stood there smiling.
Laughing she said, “This is amazing! I can’t believe you did this without me finding out. Can we take it out for a quick spin?”
She took them for a quick trip around the nearby backroads. The music was loud, the car was quiet, and she drove like a Formula 1 driver. After 45 minutes they pulled back into the driveway, still grinning like kids.
They sat down over a cup of coffee and he finally started to talk. “I had to trade in the other car to get this one.” She immediately realized that meant he would be driving the car to work every weekday. This meant the car was now less than 30% hers and more than 70% his.
She quietly sipped her coffee and adjusted her excitement. Then she heard him say that he couldn’t believe how low the payments were on the 36-month lease. She choked on her coffee. Did he just say that he was going to use the car most of the time and then they would give “her gift” back in three years?
The morning quickly became less enjoyable. She asked, “How does this gift fit their long-time model?, and Why did he decide to change the rules of their game when it had worked so well, for so long?” The intent of the gift was clearly no longer selfless or focused on the desires of the recipient. Their relationship survived, but the magic of the game was broken and was never played again.
Intentionally building stock options to take back what someone has earned through effort, time and investment is just a bad faith deal, in my humble opinion. Don’t use stock options if you are unwilling to commit to their commonly understood intent, and don’t buy your partner a gift because you really want to use it.
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Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.
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