Exit to Richness!
Date: Friday , June 01, 2007
The past six months have given way to heightened activity on jobsites across the board. Webex, Agere, Covansys, NetDevices-names such as these have found mention in a bulk of the resumes, under the current employer description. The reason: each of these companies have either been acquired, or have filed for an IPO or been listed, setting off among their employees trepidation, and insecurity about their jobs, and resultantly their futures. “Will the new company keep us, or throw us out? Will it downsize our salaries? Or possibly transfer us to some forsaken place?” Such doubts, despite them holding options of the respective companies, have given way to them launching into a job search spree. Assurances from the employers have somehow failed to strike a chord with them.
But as some of the techies in these companies have realized over the past few months, every time their employer (company) makes an exit, it could be their own ticket to richness. How?
Owing to something called Employee-Stock Options or ESOPs. Let’s take the case of a Webex (which was acquired by Cisco) employee to carry home the point. Consider the techie, say Mainsh, joined Webex at a time when its stock was trading at $23. He got 1000 options, as is the norm for junior engineers in India, of which he was told 25 percent would get vested a year later, and 1/36th of the remaining number every month through the next three years. Thus four years later, Manish could get a handsome return by selling off his options in the market. But early this year, it was announced that Cisco would acquire Webex at $57 per share. Whilst his contemporaries started job-hunting, Manish, enlightened of the power of options by a returnee friend, stuck it out in Webex. When the deal finally came through, Manish was given the option of either keeping all his shares of selling them off to Cisco at $57 per share.
He did the obvious-he sold off the shares, netting a net profit of $34,000. While 1000 shares fetched him $57,000, $23,000 was deducted by the company as the price for the 1000 shares. And he had the option of keeping the job too.
Sadly though, the story of employees making a fortune was not put in the public domain by the company. Stories like his have been used as a prime motivating factor by companies for hiring talent in the Valley, with the likes of Microsoft at one point claiming openly that they could make millionaires out of even secretaries in a year’s time, through ESOPs. But somehow, Indian subsidiaries of these companies have shied away from expressing in monetary terms the value of ESOPs.
In fact, when The Smart Techie tried getting a peek into how much money employees of the aforementioned companies could / had made during the company’s exit, all of them, barring Webex, refrained from giving any numbers. “We talk about ESOPs and their potential in detail during the recruitment process,” says Alok Kothari, India head of Aruba Networks, which recently got listed on the NASDAQ. While the point may hold good, how does a techie interested in working with a small company, but one who hasn’t applied in Aruba, get to know of the fortune that awaits him?
As with all stories, ESOPs have a flip side too. As many who had joined startups during the boom time, and lost money consequently will tell you, you get a zero return on ESOPs if the value of the stock goes down from the strike price i.e. the price at which the employee is given the options when he joins. This characteristic has only worked towards creating further doubts and insecurities in techies’ minds, who managers admit, have very little know about stock options. In this light, RSUs or Restricted Stock Units might help salvage the situation.
Contrary to ESOPs, in RSUs, even if the stock trades at a value lesser than the strike price, it would fetch some return. For example, while a stock option grant with a strike price of $10 has no value when the stock trades at $8, an RSU awarded when the stock was trading at $10 is still worth $8. While a stock option has lost 100 percent of its value, the restricted stock has only lost 20 percent.
This point though is ill-understood by techies, and the studied silence on the part of companies only works towards worsening the situation. Not only do techies lose the opportunity to cash-in in case of an exit, organizations too have to invest afresh in hiring and training new talent.