Google’s experiment begins…

February 22, 2007

chimp.jpegLate last year, Google (GOOG) announced a unique program that would allow employees to start auctioning off their vested options. The program, called the “Transferable Stock Option Program” was set to kick off during the second quarter, though there were few hard details at the time, other than that the auction would be managed by Morgan Stanley (MS).

But now, the wait is over. Earlier today, Google filed both a prospectus and supplement that fill in some of the blanks. According to the filing, Google is currently working out some of the kinks, using 20 pre-selected employees as part of its test-launch. The program will be rolled out to other Google employees in April. Here’s a snippet:

Employees will use the TSO system to see the current highest bid price offered by the participating financial institutions for their vested options. During regular TSO market hours, the TSO system will continuously update to display the highest current bid price for each eligible option. All participating financial institutions will be required to bid on all of the options eligible for sale as a condition of participation in the TSO program, although the participating financial institutions may place zero dollar bids. A bid will be valid, at the time submitted by the participating financial institution, for at least 1,000 shares underlying options. A bid will remain in force until either the total available size of the bid is purchased at the bid price or a revised bid is submitted by the auction manager or a participating financial institution. Employees will receive the highest bid price at the time their market order is received, which may not be the same as the latest quote provided through the TSO system. No order may exceed 1,000 shares.

Here’s how what Google is calling the “test launch” will work: each of the 20 employees will receive five transferable options to purchase one share at different exercise prices, with the price higher than Google’s current price on the day the option is issued. During the test, only one institution will be able to bid on the options. But once it’s rolled out to all employees, there will have to be at least two competing bids before the employee is notified. In the filing, Google estimates that the program will lead to a $90 million charge during the second quarter and $160 million over the life of the program.

Is rolling out a program to 20 people each exercising 5 options a good way to test a program that’s likely to be significantly bigger? I’m not the Google expert that Paul Kedrosky is. But clearly, this will be interesting to watch.

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