Market Dips Have Silicon Valley Net Workers Reconsidering Their Options

I'd never have believed it: in my own household, stock option mania has taken hold. My wife, a copy editor by trade, hired on with a dot com and was given her choice: a great salary, or an extremely good salary with a hefty slug of options. A long-term thinker, she took the options. Now, after work, she frets over the spasms of the Nasdaq and wonders what perils await her company's IPO.

The stock option-as-compensation method of attracting employees is now a well-established tradition in Silicon Valley, as deeply-rooted as prune and berry orchards were before the technology boom. Before the Internet sent stock prices ballooning and provided the media with a host of get-rich-quick stories, stock options attracted many of the people who built Cisco Systems, Apple Computer and other valley stalwarts. Today, when someone proudly announces that they have a new job, the first question that often greets them is about the number of shares they're entitled to and how long it will take to vest.

But a lot of the people who make the Internet whir are not long-term thinkers, and most of the companies are not established firms whose long-term successes appear assured. Many of the engineers are young people who have never worked in a tough economy, have never known a flat stock market, and have peers who have already cashed out or have moved into their second pre-IPO jobs. And for these folks, the recent Nasdaq belly-flop is a jarring thing, indeed.

The early comers to e-businesses are not affected quite as much as the most recent additions to technology companies, who may have signed on for options after initial offerings at a higher strike price than their more senior co-workers. The reason behind this is easy to understand; when a company like Red Hat Software has its stock price catapult in November 1999 to nearly $150 per share, a strike price of, say,$30 sounds great. When the stock splits and a market crash-dive drags the share price to less than $18, it's another story.

In many cases, according to my sources, strike prices are now higher than the stock values for recent hires. For a host of new-generation engineers, dreams of an SGI workstation on the dining room table, a gleaming new VW Beetle in the driveway and an early retirement devoted to mastering networked computer games and creating eponymous versions of Linux have evaporated faster than you can type "control-alt-delete."

When you agree to take less salary in exchange for stock options and your stock options suddenly become worthless,at least for the time being,you may decide that working 16-hour days and devoting your entire life to the company is no longer a trade-off worth making. That's especially true if the work environment is unpleasant or the business model has shifted away from the goals that originally attracted you. Options work both ways,they promise wealth if the company succeeds, but they also shift the risk to the employees and effectively chain them to their jobs until they vest. If vesting means nothing, the employee has nothing to lose by leaving.

That does not bode well for Internet-focused companies counting on stock options as a primary source of compensation. Talent is still at a premium and companies are eager to court engineers who show any inclination to jump ship. Using stock options as the enticement to bring new people on board no longer works the way it did six months ago. And, perhaps most worrying, the "option-aires" who formed the cores of many now-successful Internet-focused start-ups are now fully vested. Keeping them around will mean keeping them happy, which may spell an end to their 16-hour days and weekends at the office. Can companies afford to keep such employees? Can they afford not to? It's a question that companies will have to agonize over.

There are more than 10 million Americans whose compensation includes stock options; as a result, if you're a technology company, shifts in the market could result in a constant and costly game of musical chairs unless your enterprise offers more perks to employees than a potential one-time big score.

My wife's employers seem to understand this. She enjoys her job, she's paid well, there's a company beer bash every Friday and she can even take the dog to work. Companies can't stay pre-IPO forever, and providing these sorts of options may be more powerful in the long run than the lure of stock options.