Options Backdating and the Little Guy

Number of tech companies are being scrutinized around back dating of options, with fresh fuel each week. HP acquiring Mercury last week raised it. Apple. Brocade.

It is a complex area, but the consensus view appears to be "There is no law against backdating. However, it needs to be adequately disclosed, properly treated for tax purposes (employee comp among other things) and properly accounted for." Complex enough that Larry Sonsini of Wilson Sonsini, widely respected in the Valley is also caught up in  it, according to the NY Times.

I am sure it will be a three ring circus. But as the SEC examines options pricing and dating,  let me throw in a plea for the little guy - the small employee in these companies and other tech firms. It should also consider relaxing quiet period restrictions on non-executive employees. The issue at hand was meant to reward them in the first place. Options were a decent portion of their comp and they had little control over its pricing.

In the late 90s, I received options at Gartner. But as an employee you are subject to "quiet periods" where you cannot trade stock, even though most employees have little to zero knowledge of their company's financial details.  Several quarters in a row I noticed the stock price would dip as soon as the quiet period ended.  As soon as the period started again the price would go up. I think most employees lost between 10 to 15% of value because they could not trade at the higher prices. Now you may say that's just demand and supply. During the quiet period, the employee sell orders dropped off. But compared to institutional investors these transactions were small. I thought about going to the SEC to investigate if someone was taking advantage of the quiet period timing. I should have because I suspect it was happening around stock of number of other companies with employee options.

Whether it was demand-supply or someone mucking around, losing 10 to 15% of your options value is not fair to the little guys. You are bound by the quiet period even if you work in Timbuktu, far far from corporate. Likely the only insider information you have is the CEO's 4 digit internal phone extension. I bet you any backdating advantage does not come close to compensating them for any quiet period dip.

As the SEC goes after the executives, it is important it also thinks of the little guys it is supposed to protect. The non-executive employees who get options have little control over pricing - at grant or at exercise (other than their contributions to making the company successful). I would relax the quiet period restrictions on such employees.