VMware employees may get new pricing on stock options

When your company’s stock is being labeled as “under water,” employees with stock options take notice and begin watching the stock market with a bit more resolve.

VMware employees who received stock options after the company’s IPO have watched it skyrocket to $125 only to watch it come back down to Earth in the $30s.

Now, VMware is planning to use a method of making employees whole on their stock options.

The company disclosed in an SEC filing that it plans to offer its employees the opportunity to exchange their post-IPO (“underwater”) stock options for an equal number of new options. The exercise price of the new options will be the stock price at the close of trading on the day immediately following the date that the exchange is completed. This option belongs to all U.S. based non-executive employees. Non-U.S. employees will be granted a to-be-determined proportionate number of restricted stock units after the exchange offer for U.S. employees has been completed.

Participation in the exchange is completely voluntary. Doing so may get the employee out from under water, but taking the company up on the deal will also restart the employee’s option vesting schedule. Depending on the employees’ goals, they may choose not to participate.

Now that Diane Greene has been replaced as VMware’s CEO, is this an act of kindness to the watchful eyes of the troops by new CEO Paul Maritz? Maritz writes, “Although I can give no guarantees or assurances, by giving you an opportunity to receive options with an exercise price closer to our current market price, I hope to provide you with a greater opportunity to benefit from any future successes of the company.”

John DiFucci, a software analyst with J.P. Morgan was quoted as saying, “Given the recent departure of CEO Diane Greene, we view this move as an effort to abate a brain drain from the company… While we consider this a modest positive for the stock, we also note that it acts to slightly dilute current shareholders.”

VMware’s stock (VMW) closed at $38.89 in the regular session, and was down another nine cents in after hours trading. With shares currently just below the $40 mark, well below the $100+ after the IPO, it is safe to say that many issued options over the last year are under water.