According to the National Center for Employee Ownership (“NCEO”), as of early 2008, there were approximately 3,000 broad-based (i.e., plans that grant stock options to 50% or more of full-time employees) stock option plans and 9,000,000 employee stock option plan participants. The value of outstanding stock options is measured at several hundred billion1. A June 23, 2009 article in the NY Times titled "Citigroup Has a Plan to Fatten Salaries" stated that Citigroup plans to award millions of new stock options to employees in an effort to retain workers and neutralize a precipitous drop in the value of their stock holdings. The new plan is expected to be introduced later this year. The article noted that the new plan could "open the floodgates for the release of tens of millions of stock options that could be cashed out over the next three years."
Employee stock options remain a significant and widely used form of equity compensation.
iOptions Monetization Strategies
Since March 2000, iOptions and the International Securities Exchange, Inc. (ISE) have been collaborating on a new margin rule to facilitate the ability of employee stock option holders (ESO Holders) to use vested employee stock options issued by publicly traded companies as collateral in certain listed option hedging and monetization strategies without the requirement of margin (the Rule). Prior to June 2009, such transactions were deemed “naked” for margin rule purposes and subject to a deposit of cash margin, effectively making the strategies cost prohibitive and impractical. The Securities and Exchange Commission (SEC) published the iOptions/ISE and iOptions/Chicago Board Options Exchange (CBOE) proposals for comment on May 8, 2009 and on June 17, 2009, the SEC approved the ISE and CBOE proposals. The ISE Rule can be viewed HERE and the SEC approval order HERE. The CBOE Rule can be viewed HERE and the SEC approval order HERE.
Significant Interest in Monetization of Employee Stock Options
There is significant interest in creating liquidity for ESO Holders, as indicated by a recent initiative by Google Inc.
In the second quarter of 2007, Google implemented a transferable stock option program that enables certain of its employees to sell their vested employee stock options to financial institutions that bid on the options through an auction process (the TSO Program or TSOs).2 Essentially, TSOs permit Google employees to partially monetize and partially capture a portion of the time value embedded in their employee stock options prior to maturity.
While iOptions believes Google’s TSO Program validates iOptions’ monetization strategies, there are four critical differences between the programs.
1. Unlike Google’s TSO Program, which will generally truncate the remaining term of Google vested employee stock options to two years upon their sale (resulting in ESO Holders forfeiting any time value of their vested employee stock options beyond the two-year period), the Rule allows ESO Holders to potentially monetize the entire remaining time value of their vested employee stock options because the term of the vested employee stock options is unaffected by the iOptions strategies.
2. Under the Rule, an ESO Holder only sells his/her vested employee stock options if the listed or OTC options that the employee hedges with are assigned.3 Accordingly, for so long as the employee holds the vested employee stock options, the employee continues to maintain an equity stake in the company, thus preserving the original retention and reward elements of the employee stock options.
3. Permitting ESO Holders to engage in the iOptions transactions does not require the administrative and expense burden that a TSO Program necessarily entails because the iOptions’ transactions are executed in the publicly traded, listed options markets. Accordingly, the iOptions program does not require a custom built auction system, recruitment of third-party financial institution bidders or a third party auction administrator.
4. Finally, as noted above, the iOptions transactions are generally carried out in the publicly traded, listed options markets. The listed option markets provide ESO Holders with liquidity, pricing and transparency that far exceed that of a private, opaque auction market with limited bidders and high costs.
1 Although the NCEO notes that this is difficult to estimate; see: http://www.nceo.org/library/eo_stat.html