Anyone Underwater in Vancouver?

Nicolas Carlson of Silicon Alley Insider points out that as tech stocks plummet, workers employed by Silicon Valley’s finest find themselves holding worthless options – the kind that would allow them to buy company stock at higher prices than they are currently being publicly traded. Hence, the term “underwater.”

As of October 24, more than 80% of Silicon Valley’s 150 largest publicly traded companies have employees holding underwater options, according to executive compensation research firm Equilar. CEOs at 90% of those companies also held options worth less than their strike price.

At Google, fully a third of the company’s 20,000 employees hold underwater options. Last month, Google (GOOG) sought to soothe anxious employees with an internal employee-compensation presentation, reminding them that their Transferable Stock Options are worth more than regular options.

Why is this a problem?

Some companies will ask shareholders for permission to lower the strike price of a portion of their outstanding options. But when stock prices drop, investors typically balk at allowing companies to reprice employee options. That’s where the problem lies – in Silicon Valley (and elsewhere) options are a key part of employee compensation.

Valleywag’s Paul Boutin points out what could happen if these options at companies like Google aren’t repriced:

Mountain View’s biggest advertising company went on a hiring binge, backed by what seemed like an unlimited money supply. Now, thousands of shoulda-been millionaires have only their salaries as compensation. A surprising majority of GOOG employees I know don’t really like their jobs. Will they stick around for the free snacks?

Will this be a problem in Vancouver? Hard to say but if I worked for Business Objects or EA was holding options with a $40 strike price, I certainly wouldn’t be feeling great about my company losing 40% of its market cap (charts: Business Objects parent SAP & Electronic Arts) since September 19th. That being said, I’d be pretty happy to still have a job.