Workers Share in Angst About Plunging Stock

For employees at many technology companies that have gone public in the last year, stock options so far aren’t living up to their flexible name.

With so many recent initial public offerings, or IPOs, now trading below their offering price, the big payoff many workers expected from their stock options has dwindled--or has evaporated entirely.

That’s true at tech companies in general. But it can cause particular problems at start-up tech firms, where workers might have signed on just in the last year or so, and sometimes at low salaries--in part because of expectations for an options payoff.

The plunge in share prices has many newly public companies scrambling to retain workers and boost morale. Management and venture-capital investors in these companies are spending more and more time on option issues, something many didn’t count on.

“For already-public companies, the underwater options are a real concern. How do you keep people motivated?” said Bill Burnham, a venture capitalist with Softbank Capital Partners, a Bay Area venture firm.

A standard options package allows an employee to buy a set number of shares at a particular price--the “exercise” or “strike” price--over a specific “vesting” period, usually four years. If the exercise price is, say, $15, and the stock is at $30, the employee earns an immediate 100% profit by exercising available options.

But if the market price now is below the exercise price, the options are worthless. The market price could rebound, of course, but psychologically an “underwater” option can be a severe blow to worker morale.

The potential solutions, meanwhile, all have a cost involved. Many companies decide to issue workers more options at lower exercise prices, but that can anger institutional investors by creating a bigger future option liability that will dilute the investors’ stake in the firm.

Companies can re-price existing options, but new accounting rules force firms to take a charge against earnings if they re-price.

Canceling underwater options then issuing new ones within six months also raises accounting problems, according to Linda Griffey, an attorney at O’Melveny & Meyers in Los Angeles who specializes in compensation issues.

Finally, giving cash payments to workers in lieu of worthless options means a direct hit to the bottom line.

Still, many firms are finding they have to do something.

“It can be somewhat acrobatic, but you do what you can to get more shares, at better strike prices, into the hands of employees,” said Bob Hoff, an investor at Bay Area venture firm Venture Partners.

Companies that fail to make up for workers’ option losses are vulnerable to defections. Tech workers who have made a habit of jumping to other firms if their current employer’s options fail to quickly pay off as expected are dubbed “option surfers” in the industry.

“That’s the big problem so many companies have now,” Griffey said.

Jeremy Loeb, formerly a senior project manager in the Los Angeles office of IXL Enterprises (ticker symbol: IIXL), an Atlanta-based Internet consulting firm, recently left the company although he survived a layoff at the firm just weeks earlier.

Loeb said the 80% of his stock options that have vested would have been worth several hundred thousand dollars at the stock’s height. But with the share price now $2.59--down from $57 in January--his options are worthless, he said. “I never thought they would get this low,” he said.

Some large tech and telecom companies have led the way in trying to fix damaged options packages. In October, Sprint Corp., the third-biggest long-distance phone carrier, said it would offer new options at the current share price to 24,000 employees whose options have become virtually worthless since the collapse of WorldCom Inc.’s bid for the company in summer.

Microsoft Corp. and Amazon.com Inc. recently took similar measures with workers’ options.

Yet Griffey said an increasing number of workers now want cash--rather than more options--to stick around. “People now realize that stock doesn’t always go up and stock options don’t always make you rich,” she said.

Some workers have learned that the hard way. One employee recently laid off from a Los Angeles tech firm said she is “bruised and battered” by the experience of working long hours in hopes of a $500,000-plus payoff from her options. The woman, who asked that her name not be used, said many of her co-workers had taken out loans based on expected option riches.

“I would take stock options again, but not in lieu of salary. Never, never, never. I wouldn’t recommend it to anyone,” she said.

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Connect: Check out other California Dealin’ columns at https://www.latimes.com/caldeal

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Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.

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Tracking the Deals: Upcoming California IPOs

A look at initial public offerings planned by California companies. For more information on upcoming deals, contact the companies or the underwriters. Note: Virtually all of the companies and underwriters have Web sites.

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Ticker in share Company symbol City Industry millions price Optical OCPI Chatsworth Fiber $116 $10-$12 Comm. optics TriNet TRNE San Leandro Outsourcing 51 12-14 Group Luminent LMNE Chatsworth Fiber 168 13-15 optics Transmeta TMTA Santa Micro- 156 11-13 Clara processors Comp. CATZ Santa Network 46 12-14 Access Clara systems AeroGen AEGN Sunnyvale Medical 50 13-15 systems Novatel NVTL San Diego Wireless 77 10-12 Wireless access Alliance AFOP Sunnyvale Fiber 75 11-13 Fiber optics Kabira KABR Palo Alto Network 44 10-12 Technol. software

Size, Est. est. Company Underwriter week Optical UBS 10/30 Comm. Warburg TriNet Robt. W. 10/30 Group Baird Luminent CS First 11/06 Boston Transmeta MS Dean 11/06 Witter Comp. Robtsn. 11/06 Access Stephens 11/06 AeroGen Chase H&Q; 11/06 Novatel CS First 11/13 Wireless Boston Alliance Merrill Lynch 11/13 Fiber Kabira Deutsche 11/20 Technol. Banc AB

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Source: IPO Financial Network (https://www.ipofinancial.com)