Using Stock Options as Currency: The Perils of Success

I'll admit it: I've been pretty critical of mainstream media on occasion. But Kevin Delaney of the Wall Street Journal penned an excellent piece today on the challenge Google is facing attracting and retaining talent given its scale and stock price. This is not a particularly new theme; I've written about this concept in the context of creative destruction several times over the past year. But Mr. Delaney provides many concrete and highly relevant examples of how Google is become a victim of its own success, something about which senior management is aware but has fewer levers to pull given its $500+ stock price and sexy pre-IPO companies like Facebook:

As Google Inc. exploded into a company of more than 12,000 employees, attracting a million resumes a year, the Internet giant rarely lost staff to start-ups or had prospective workers turn down job offers. Now, though, Google's magnetic pull on top Silicon Valley talent is showing signs of weakening.

Take Justin Rosenstein, 24 years old, a Google employee since March 2004 who invented its Web-site-building service, Page Creator. He joined social-networking start-up Facebook Inc. last month as a senior software engineer, and says Google's past success in hiring entrepreneurial people helps explain why it's seeing some of those people leave as it becomes larger: "That same caliber of people is naturally going to consider carefully whether it's at Google or somewhere else that they have the most potential to do big things and do them quickly."

Now, to be clear, Google's recruiting and HR department may well be the best on the planet. They have fostered a culture that is very enveloping, very supportive and very flexible for its brilliant, high-performance, creative workforce. And this is not an inconsequential lever in the face important quality-of-life issues.

It's unclear whether the latest departures will have any impact on Google's performance down the line. But the company acknowledges that creative and entrepreneurial people are the core of its success -- that's one reason Google lavishes them with extravagant free food and other perks. "If we do not succeed in attracting excellent personnel or retaining or motivating existing personnel, we may be unable to grow effectively," Google has acknowledged in regulatory filings.

But still, by having among the best, brighest, most ambitious and sought-after people in the technology world on your payroll, it inevitably comes down to the bottom line: money and a direct relationship between what you do and the payoff you get. This is very hard to achieve in a firm with 12k people and a $160 billion market cap:

Facebook, Mr. Rosenstein's new employer, is one company that professes having an easier time competing with Google for staff. Co-founder and engineering vice president Dustin Moskovitz says the 250-person start-up has managed to hire 10 out of the roughly 11 engineers who had rival job offers from Google since the beginning of the year, an improvement on the past.

"There are lot of people [at Google] who are talking about leaving now and what they want to do next," says Mr. Moskovitz.

Mr. Rosenstein says he still loves Google, but was attracted enough by the "huge potential upside" at Facebook and other factors to leave "a lot of value on the table" in stock options that had yet to vest when he jumped. After leaving, he posted a note online for friends describing Facebook as "the Google of yesterday, the Microsoft of long ago."

You know what this sounds like? Wall Street and the evolution of where money is made across the broker/dealer community. It used to be that you could mint money in the cash business. It was great! Then it got big and competitive, spreads came in, machines started doing the work of people, and the people-driven cash platforms began to wither. And then derivatives blossomed. First spreads were wide, it was the "wild west," then counterparties got more comfortable and transactions got more standardized, capital rushed in, the fun ran out of vanilla derivatives and ran into the structured end of the derivatives business. Then proprietary trading became hot. And on and on.

As capital flows into to attactive opportunities, be they companies, technologies or business lines, returns naturally compress and those opportunities need to be re-invented in order to continue their growth and prosperity. Or, as is frequently the case, the best and brightest that identified and extracted value from the opportunity in the first place move on to greener, more exciting pastures, where the direct relationship between work done and rewards received are immutable. As in entrepreneurial Wall Street groups. Or in pre-IPO, entrepreneurial companies. We're starting to see this happen with Google, which is simply a function of its overwhelming success. Will they be able to stem the tide and avoid the fate of Microsoft and Yahoo!? Maybe for a while, sure. But the inevitable weight of success will hamper them more and more over time. It is just the nature of things. And, as the old saying goes, "You Can't Fight Mother Nature."

 

Comments

[Jason Wood]

Roger,

What's interesting is that Google hiring managers have almost carte blanche mandates to acquire as much talent in emerging economies as they can get their hands on. I spoke with someone last week and they are hiring people in the BRICS (at the expense of Microsoft and others) with a fervor that goes well beyond any immediate plan of action for the assembled heads.

[Yaser Anwar]

http://www.bloomberg.com/apps/news?pid=20601109&sid=aJ5z5JLM4JP8&refer=exclusive

[Roger]

The fate of Microsoft is one of a rocketing stock price, an increasingly fossilized organizational structure, a substantially lower stock price, and then difficulty attracting the types of people Google has been able to capture. Can Microsoft pay lots of cash to get good people? Yes. But not the same entrepreneurial types drawn to places like Google, and now Facebook and other successful pre-IPO companies. And is Google likely to suffer the fate of Microsoft? If we fast-forward 12 years or so (roughly the age spread between the two companies), I'd say the odds would say yes.

[Jed Christiansen]

"avoid the fate of Microsoft"?

From my experience, Microsoft is still able to consistently hire A performers. Perhaps you mean that the fate of Microsoft is that they're aren't a company that can consistently hire A+ performers?

In that case, I think Google certainly should be worried, for all the reasons you discuss above.