Stock Options

June 1, 2000 at 12:00 AM EST

TRANSCRIPT

PAUL SOLMAN: At San Francisco Airport, Silicon Valley salesman Jason Beeken, about to meet in an executive lounge with two of California’s hottest high tech headhunters who let us sit in on the meeting.

SPOKESMAN: Let’s talk about money. Last year, 1999, your W-2 was?

SPOKESMAN: 230.

SPOKESMAN: 230. Where do you think you’ll end up this year? I’m really shooting for probably upwards of 300 on up, so. Kind of set the benchmark this year, so looking to kind of take it up a notch next year.

SPOKESMAN: Keep raising the bar?

SPOKESMAN: Yeah, definitely.

SPOKESMAN: Perfect.

PAUL SOLMAN: Bob Silver and Howard Lee had been hired by a bay area start- up planning an IPO, an initial public offering of its stock on the open market. The main pitch to 30-year-old Jason: A pay package including options to buy that stock for a song.

SPOKESMAN: And we’re talking about something in the neighborhood of 15,000 shares of pre-IPO stock, somewhere in the two dollar range as a price of options, and of course it’s too early to tell where a company’s going to be when they IPO, okay, but if all we did was compare them…

PAUL SOLMAN: In short, if this new company does as well as some similar start-ups, Jason’s 15,000 shares at two dollars a share would be worth more than two million dollars. The difference between the option price and the expected market price. Jason will have to wait awhile because options to buy stock at an artificially low price can’t be exercised and cashed in right away, but eventually, he figures, he could be rich.

SPOKESMAN: Right. And that’s really what I’m looking for because, you know, a $200,000 to $300,000 a year income is, you know, probably great and definitely secure. I think you can have a great life, but you know, if we all kind of want to get to a point of retiring early or earlier, then it just comes down to equity. You’ve got to own in something.

PAUL SOLMAN: You’ve got to own. That’s the new mantra of the new economy which you see in Northern California everywhere you look. The dot-coms seem to have taken over here, creating enormous wealth, and stock options have spread that wealth throughout the high-tech labor force. At the beginning of the 1990′s, about a million American workers had stock options in their companies. Today, the number is nearly ten million. The main argument for options is that they motivate employees to work harder, smarter, more efficiently, so as to make their company more valuable, its stock price higher, at which point they can exercise their options at the old, low price, resell them at the new one, and cash in big time. At the Berkeley-based startup Xamplify, no job is too menial for the worker/owners. Programmer Steve Mays is one of several refugees from a far more solid firm, industrial light and magic, which did the computer graphics for “Star Wars.” But that company is owned entirely by the director, George Lucas.

STEVE MAYS, Chief Programmer, Xamplify: You work hard, you work 60 hours a week, and George gets on TV and George makes several billion dollars, and you make your salary, and you know, it’s not really as much incentive to work the long hours.

PAUL SOLMAN: But here, Mays had already put in a full day’s work, and was just taking a game break before his night shift.

STEVE MAYS: What’s up, Ahmed? Oh, gangway. I’m going to go gangsta on you now. How about that?

SPOKESMAN: Oh, oh, geez.

PAUL SOLMAN: Steve Mays’ victims were colleagues in adjoining cubicles, two of whom were former investment bankers who’d gone high tech, joining Xamplify in part for the options.

DAVID FISHER, Programmer, Xamplify: If you’re going to work 80 or 90 hours a week in an investment bank versus working 80 or 90 hours a week in a place where you’re getting reasonably compensated as well as getting stock options, well, it seems like there’s no choice.

AMIT JAIN, Programmer, Xamplify: If you’re an owner in the company, there’s, you know, aside from just wanting to do well and progress up the corporate ladder, you have the sort of underlying drive to make the company as a whole better.

PAUL SOLMAN: Xamplify is hoping to change the Internet by helping large firms tailor their Web sites to the psychological profiles of those who visit them. Bob Burnett, on the left, is one of the company’s main investors. And how did he get his money — by cashing in options which he got at a startup, along with a 50% pay cut, when he left IBM years ago.

BOB BURNETT, Investor, Xamplify: When I started out, I started writing programs in 1963, you could do superb work, but you got your salary. And what happened in the 1970′s and of course dramatically in the 1980′s, now in the 1990′ there’s been an expansion of the use of stock options, and that’s allowed people like me, who basically come from families of modest means, to greatly expand their net worth.

PAUL SOLMAN: Burnett is one of Silicon Valley’s many so-called “optionaires,” multimillionaires via options. And that startup he made his fortune at? Well, it’s called Cisco Systems, now one of the most valuable companies on earth. According to its CEO, John Chambers, stock options help explain Cisco’s stupefying success.

JOHN CHAMBERS, CEO, Cisco Systems: 42% of our options go to individual contributors, not managers or directors of VP’s. If somebody would have told me in business school I was going to do that, I would have said, “that’s socialism,” when in fact, it’s the ultimate form of capitalism, and it really works.

PAUL SOLMAN: At the Harvard Business School, there’s a professor who takes the argument a step further. Bryan Hall thinks stock options help explain not just the rise of Silicon Valley, but the resurgence of the U.S. Economy in general.

BRYAN HALL, Harvard Business School: Between the late 1960′s and the early 1980′s, the stock market was essentially flat. It’s just remarkable how managers had essentially taken control of corporations and the owners of companies had lost control of the very companies that they owned.

PAUL SOLMAN: Hall claims the case of Armand Hammer summed up the period. Armand Hammer owned hardly any of the company he ran, Occidental Petroleum, yet treated it as a personal fiefdom.

BRYAN HALL: He had a whole variety of private pet projects that he liked. And he had loaded up the board with all of his friends, and at that point it’d become almost completely unaccountable to the shareholders. There were periods when it was announced that his health was failing and the stock of the company would rise dramatically.

PAUL SOLMAN: The brutal truth is that to its shareholders, its owners, Occidental was worth more with its CEO dead than alive. But nowadays, says Hall, with the widespread use of options, managers and workers are shareholders with a stake in keeping costs down, productivity up.

BRYAN HALL: Right now, what we have is a gold rush called E-commerce. We really don’t know how much gold is out there yet, but what we do know is that we can structure a contract where if you strike gold, then we’re going to share td with managers, the venture capitalists, and the workers.

PAUL SOLMAN: Now, in a gold rush, everyone’s going for the gold, right down to the local retailer. One of the Bay area’s great fortunes was made by Levi Strauss 150 years ago, when he sold great quantities of oh-so-durable denim, and just about anything else, to the original San Francisco ’49′ers. But at Xamplify, where a Levi Strauss heir is one of the investors, many of its suppliers are trying to go Levi one better. Instead of cash for their goods and services, they too want options. Xamplify CEO. Jeffrey Klein, who happens to be an old friend of mine, was buying Aeron chairs for the office– $1,300 each, retail. His supplier got him a great price.

JEFFREY KLEIN, CEO, Xamplify: And then he wanted to do the whole deal in stock. I mean, some day, if this economy keeps going, I can see myself going into copy central with ten pages and they’ll say, “it’s a $1.10, or if you’d like to give me stock options, I’d be glad to take that.” At a certain level, it gets ridiculous.

PAUL SOLMAN: Klein paid cash for the chairs, but he has used options to pay his banker, his lawyer, his employee recruiter– who competes with headhunters Bob Silver and Howard Lee, who also often take their fee in options.

BOB SILVER, Executive Recruiter: Yeah, it’s just the question is, how do we keep the lights on in the meantime? If all we did is took options, then it would seem to me that at some point in time, we would have enough stock options and stock certificates to wallpaper the walls with, and not enough cash to pay the rent.

PAUL SOLMAN: So it’s this constant tradeoff.

HOWARD LEE, Executive Recruiter: We’re also finding out that some companies feeling very, very success-oriented are a little reluctant to give up pieces of the business.

PAUL SOLMAN: Indeed, we found such reluctance at Xamplify. CEO Klein gives his prospective hires the choice between more pay and fewer options, or…

JEFFREY KLEIN: More options and less cash. And we generally prefer that they take all the cash, but of course, not a single person has done that.

PAUL SOLMAN: You would prefer they take cash?

JEFFREY KLEIN: Yes. I… You know, I guess to be honest, I’d prefer they take a few options, because you want them involved in the business. But of course, all our internal indications are they’re going to be worth quite a bit of money, so we don’t want to give too many of them up.

PAUL SOLMAN: Now this brings up a classic objection to options: That if you believed in your company’s future, you’d rather pay cash than give away pieces of it. So maybe firms that give options liberally are just shifting the risk of failure to their employees. And that’s just what two prominent critics of the e- revolution, Bill Lessard and Steve Baldwin think has been happening: That options are exploiting the wishful workers of the dot-com world.

STEVE BALDWIN: In many cases, there is no big payoff. There may just be a burnout for themselves because a lot of these companies are very mercurial, very tough places to work, and burnout is a factor.

PAUL SOLMAN: When you say burnout, what do you mean?

BILL LESSARD: It means that you’re road kill on the information super highway. It means that your resume looks like Swiss cheese because you’ve had six jobs in the past three years. It’s, you know, working on the weekend. It’s working to all hours of the day and night, believing that you’re going to get rich, and ultimately watching as your stock options turn into pink slips.

PAUL SOLMAN: The problem, say Lessard and Baldwin, is that lots of would-be optionaires are chained to their companies, awaiting the stock run-up that never comes. In fact, this spring’s NASDAQ nose-dive alone wiped out tens of billions of dollars in option wealth.

BILL LESSARD: I know several people who are working at technology companies where the stock is lower, right, than the issue price. So if the company went out at 15, the shares are now at ten, and essentially their stock options are worthless. And that’s why we’re here. There’s a lot of mad people who’ve gone into this industry with very, very high expectations– “I’m going to grow up to be Bill Gates.” Well, you’re not.

PAUL SOLMAN: Lessard and Baldwin have written a book, “Netslaves,” and created their own Web site, Netslaves.com, to depict the lower depths of high tech. But we ourselves have interviewed more than a few optionaires. Isn’t the gold rush for real?

BILL LESSARD: If you go back in history, I bet you everybody those days knew somebody that hit it big in the gold rush as well. It’s the same thing: But a lot of people went home penniless.

PAUL SOLMAN: On the other hand, say options enthusiasts, very few workers in corporate America ever hit it big by salary alone. Jet-setting executive recruiter Howard Lee is sold on options because he equates them with the prosperity of Silicon Valley from which he has bountifully benefited.

HOWARD LEE: I always say, “if they could see me now, this boy from Brooklyn whose father probably r made more than a hundred dollars a week, worked for a corporation for 35 years, a retail shoe company called Melville Corporation, and died with a $29.95 gold watch.”

PAUL SOLMAN: That’s literally what he had.

HOWARD LEE: Literally, literally. Literally, when he went to his 30th anniversary, they gave him a gold watch that was costing $29.95. So that was his legacy for the devotion to the company.

PAUL SOLMAN: Do you think if Melville Corporation had given your father and other workers stock options, that they would’ve felt different about the organization?

HOWARD LEE: I think yes, it might have made a difference. Yes.

PAUL SOLMAN: In the end then, according to their proponents, stock options have made a huge difference thus far in the e-economy. To option skeptics, however, a good salary and gold watch might be better than the option of betting all your time and money on the company you work for, an enterprise which might wind up taking you somewhere you don’t want to go.