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It was Google's (Nasdaq: GOOG) darkest hour.
The "do no evil" company turned to the dark side three years ago, giving employees the opportunity to reprice their employee stock options.
The world's leading search engine could argue that it didn't have much of a choice. Stock options are supposed to be a vesting incentive, but a brutal market correction had pummeled the stock to the point where 85% of the options granted had strike prices that were underwater. How effective can stock options be as retention tools when their exercise prices are just so out of reach?
Q is for quandary
Google knew that investors wouldn't like it. They didn't get the right to adjust their cost basis. The company could've taken up to a $460 million modification charge if all of the underwater options were exchanged.
However, Google knew what it was doing. Facebook (Nasdaq: FB) and Twitter were gaining momentum, and the dot-com giant didn't want to lose key executives that could walk away from underwater options the way that foreclosed homeowners could walk away from underwater mortgages.
The repricing wasn't popular with the outside world, but it helped rebalance Google's compensation packages.
Morale was restored. Employees going for the swap had to extend their vesting schedules by a year, and perhaps that may have kept a few key hires at the company.
We don't know. We'll never know. However, now that so many of the new wave of Internet companies are waffling about as busted IPOs, could it be their turn to go the same route?
When good IPOs go bad
Facebook, Zynga (Nasdaq: ZNGA), and Groupon (Nasdaq: GRPN) are in trouble.
Zynga is bleeding executives -- lots of them. A pair of Groupon's top sales executives left the daily deals leader last month. Facebook is holding up marginally better, but even CEO Mark Zuckerberg realizes that seeing the social networking leader's stock shed nearly half of its value since going public four months ago is a problem. It doesn't help with morale, and the company may be doing something about it if the shares don't bounce back organically.
"I think it's a great time for people to join, and a great time for people to stay and double down," he said during yesterday's TechCrunch Disrupt conference.
Join? Stay? Double down? That sounds like a prelude to a stock repricing, or at the very least a new round of stock options being doled out.
Mr. Market forgives and forgets
Pretty much everyone outside of Google hated the repricing, but it did the trick. The shares eventually roared back, and Big G is now within 7% of hitting the all-time highs it reached five years ago.
Google isn't the only company that survived the stigma of giving employees a do over. A few months before Big G's repricing, VMware (NYSE: VMW) also reworked its stock option pricing.
In 2008, the virtualization software company was pretty much where Zynga and Groupon find themselves now. VMware was trading well below the post-IPO pop achieved a year earlier. It needed to do something to keep employees focused and caring about shareholder value.
It won't be an easy sell to investors if Facebook, Zynga, or Groupon go this route. After all, it wasn't the repricing that eventually pushed Google and VMware market values higher. The broad market rallied. Tech stocks came back into favor. It's debatable if employees actually even help a company increase its shareholder value for the sake of more valuable stock options.
However, today's crop of busted dot-com IPOs know that there's a precedent of success and eventual acceptance with outside investors.
The repricing events are going to happen. These companies are simply in too dire of shape not to make this controversial move. This, of course, could possibly harm investors in the process. It's just one of the many risks facing Zynga that investors need to know about. Fortunately, we break down every aspect of the Zynga story in our new premium research report. Click here to get started today, and you'll receive a full year of updates on the social gaming maven -- all at no added cost.
