Phantom Stock: In the Modern-Day Gold Rush, Do Stock Options Pan Out?

One of the drivers of Silicon Valley’s modern-day Gold Rush are stock options; essentially deferred compensation for employees, they take the form of partial ownership of the corporation through promised shares of stock at an undefined future point in time. Deferred compensation? Promised shares? Undefined future?

Why would any savvy employee agree to this?

Ah, the promise of today’s modern Gold Rush, where ownership of even the smallest piece of property might yield the mother lode of wealth for decades to come. Where individuals come together to produce value for the marketplace in an ever-expanding pie of opportunity, and the percentage ownership, while seemingly minuscule, might represent millions of dollars to the earliest employees…if, and when, the company goes through a public stock offering and converts those options to real shares.

But what happens when those stock options are, indeed, phantom? This is when the corporate executives and board members determine that they don’t want other investors’ ownership to be diluted by employment promises, and the decision is punted to later years. Yes, it is legal. However, is this the best way to hire great people and reward them for their effort? Or just a scheme, betting on the likelihood that most employees will quit, retire, or be terminated well before the corporation will have to make good on its promises?

Whether phantom or real, given an actual strike price or tied to vague market conditions, stock ownership as part of an employment agreement comes with the same ups and downs of investing in any stock. Most seasoned investors know the value of a given share in the capital markets could be impacted by a terrorist attack or a new competitor, bad economic times or a key product recall—and plan their finances accordingly.

However, when facing the same future, employees with stock options too often start believing in Never Never Land, where riches come as soon as a company goes public, where all restrictions magically disappear, regarding when and how they can sell, where income taxes are a figment of politicians’ imaginations, and where bank accounts flow immediately with tangible wealth after years of hard work.

Not gonna happen. At least for most of us.

Despite the media hype, very few companies that file actually go public and make it through the entire process. Often, they are purchased outright through a private offering. Some fail to deliver on their promises, and the amount principals believed their company was worth becomes laughable. In a free-market system like ours, that means the phantasmagorical idea of easy wealth is exposed for the fantasy it always was, and the employees who have worked for deferred compensation all those years walk away with nothing.

So why do they keep doing it?

Like the original California ‘49er’s, property ownership and control of one’s fate leads to an unshakable optimism and belief in the future. Maybe this little effort didn’t “pan out” (an expression used often when abandoning searching for gold in California streams). The next one just over the next rise will. With the experience gained and maybe a few better tools, the future will be as golden as the California hills. Look, that guy made it–so will I.

Here’s an example of greed for you, my from my upcoming Silicon Valley novel, Private Offerings (Balcony 7 Media and Publishing, September 15, 2015):

“I know you’re the man who really makes the decisions here, no matter what the board thinks,” Wilkins said coolly. “So I’ll lay my cards on the table. In order to keep me from tanking your IPO, you’ll have to buy my silence about your software bug. I have no hesitation letting the world know you deliberately released your product with flaws, compromising the world’s financial markets as well as military intelligence. That won’t go over too well with your potential investors, will it?” Wilkins crossed his foot over his knee, appearing smug and confident he had the upper hand.

Too confident.

Eric glanced at Lynn, cataloging her disgusted expression. “No, it wouldn’t. What exactly do you want from me?”

Wilkins’s eyes gleamed with greed. “I want you to write me a letter, right now, granting me half a million shares of SDS stock at the price of one dollar, with no conditions on when I can sell them. I know you have the authority to issue the grant, and the board will do whatever you say to protect the IPO. Even Rajiv jumps at your bidding.”

Eric’s mind raced. “At the price we’re talking about going public, you’ll pocket millions of dollars if you cash in right away. What makes you think you’re worth that much?”

“If that’s my take, you and Rajiv and your other investors will pocket ten times that, at least. My piece is just a tiny little expense to keep the IPO on track.”

Eric studied him, keeping his expression blank despite his disgust. “And if I say no?”

Wilkins glanced at Lynn. “I’ll ruin Lynn’s reputation if she can’t convince you to play ball. She’ll never work in PR again. Is that really what she deserves?”

(This article originally appeared on Balcony 7 Media & Publishing’s

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