Employee stock option appreciation rights securities auction process

Abstract

An online auction process for derivative securities is used to determine a fair market value of an asset or benefit provided to others, such as employee stock options. In one embodiment, the derivative securities track the intrinsic value realized by employees when exercising the employee stock options granted to them by their employers. The derivative securities may include rules for handling modifications to an employee stock option grant and/or rules for handling forfeitures of some or all of the employee stock options.

1. A method for estimating an expense of employee stock option grants, the method comprising:
 providing tracking instruments that give holders of the tracking instruments rights to future payments proportional to a value, if any, actually realized by grantees of the employee stock options upon exercising the employee stock options, wherein the rights to future payments are independent of current holders of the tracking instruments such that each current holder of one or more of the tracking instruments respectively receives a pro rata share of a predetermined portion of the net value of the employee stock options actually realized as the grantees of the employee stock options exercise their respective employee stock options; 
 storing information about the tracking instruments in a tracking instrument database of an auction system, the auction system including a processor to communicate with one or more investor systems through a network; 
 electronically auctioning, using the processor of the auction system, the tracking instruments to bidders through a website, wherein the auction system receives bids from the one or more investor systems through the network during the electronic auctioning of the tracking instruments; and 
 deriving the expense of granting the employee stock options from a price paid by the bidders for the tracking instruments. 
 
     
     
       2. The method of  claim 1 , wherein electronically auctioning the tracking instruments comprises auctioning the tracking instruments on the grant date of the employee stock options. 
     
     
       3. The method of  claim 2 , further comprising:
 delaying the setting of an exercise price for the employee stock options until the grant date. 
 
     
     
       4. The method of  claim 1 , further comprising:
 allowing the bidders to immediately resell their respective tracking instruments purchased through the electronic auction. 
 
     
     
       5. The method of  claim 4 , wherein reselling the respective tracking instruments comprises allowing the bidders to resell their respective tracking instruments through the website. 
     
     
       6. The method of  claim 5 , wherein reselling the respective tracking instruments through the website comprises re-auctioning the respective tracking instruments through the website. 
     
     
       7. The method of  claim 1 , further comprising:
 determining that the employee stock options have been modified; 
 canceling the original grant of the employee stock options; and 
 compensating the holders of the tracking instruments based on a model valuation. 
 
     
     
       8. The method of  claim 7 , wherein the model valuation is performed by an independent agent. 
     
     
       9. The method of  claim 7 , further comprising:
 treating the modification as a new grant of modified employee stock options; and 
 valuing the modified employee stock options by auctioning new tracking instruments for the modified employee stock options. 
 
     
     
       10. The method of  claim 1 , further comprising:
 providing the bidders with an estimated pre-vesting forfeiture rate for the employee stock options before electronically auctioning the tracking instruments, the rate providing an estimation of a portion of the employee stock options expected to be forfeited before vesting. 
 
     
     
       11. The method of  claim 10 , wherein deriving the expense of granting the employee stock options comprises removing the portion of employee stock options expected to be forfeited before vesting from the derived expense of granting the employee stock options. 
     
     
       12. The method of  claim 11 , wherein removing the portion of employee stock options expected to be forfeited before vesting from the derived expense comprises dividing the auction proceeds per tracking instrument by the fraction of employee stock options expected to vest. 
     
     
       13. The method of  claim 10 , further comprising:
 changing the rights to future payments in proportion to a difference between the estimated portion of the employee stock options expected to be forfeited before vesting and an actual number of employee stock options forfeited before vesting. 
 
     
     
       14. The method of  claim 10 , further comprising:
 during a vesting period, making payments to the holders of the tracking instruments based only on a number of employee stock options actually vested relative to a maximum number of employee stock options that could have vested and a number of employee stock options that are still expected to vest. 
 
     
     
       15. The method of  claim 14 , wherein the payments made to the holders of the tracking instruments during the vesting period comprise the value actually realized by the grantees upon exercising the employee stock options, multiplied by a pro rata share of the value actually realized defined by the tracking instruments, multiplied by a percentage of the employee stock options that are expected to vest, multiplied by the maximum number of employee stock options that could have vested had there been no forfeitures during the vesting period, divided by the number of employee stock options actually vested. 
     
     
       16. The method of  claim 15 , further comprising:
 after the vesting period, adjusting the payments made to the holders of the tracking instruments to account for a total number of employee stock options actually vested during the entire vesting period. 
 
     
     
       17. The method of  claim 1 , further comprising:
 refunding to holders of the tracking instruments the price paid by the bidders for a portion of the employee stock options that are forfeited before vesting. 
 
     
     
       18. The method of  claim 17 , further comprising:
 paying interest to the holders of the tracking instruments on the refunded portion of the price paid by the bidders. 
 
     
     
       19. The method of  claim 1 , further comprising:
 periodically determining a number of employee stock options exercised by the respective grantees to purchase underlying securities at respective exercise prices; 
 determining the value, if any, actually realized by the grantees of the employee stock options during a particular period to be an amount by which respective trading prices of the underlying securities at the time of exercise exceed the respective exercise prices, multiplied by the respective number of employee stock options exercised; and 
 paying the holders of the tracking instruments the value, if any, actually realized by the grantees of the employee stock options during the particular period. 
 
     
     
       20. The method of  claim 1 , wherein the rights to future payments are in a range between approximately 5% and approximately 15% of the value, if any, actually realized by the grantees of the employee stock options. 
     
     
       21. The method of  claim 1 , wherein the price paid by the bidders for the tracking instruments comprises a single market-clearing price, based on respective bids, at which all of the tracking instruments are sold to one or more of the bidders. 
     
     
       22. The method of  claim 21 , wherein the respective bids of each of the one or more bidders allowed to purchase the tracking instruments are greater than or equal to the market-clearing price. 
     
     
       23. The method of  claim 22 , further comprising:
 initially limiting the tracking instruments that are provided to the bidders through the electronic auction to a fixed number; and allocating the fixed number of tracking instruments by order of priority based on respective bid prices. 
 
     
     
       24. The method of  claim 23 , further comprising:
 if two or more of the bidders submit respective bids at a same bid price, each greater than or equal to the market-clearing price, allocating the tracking instruments to the two or more tied bidders on a pro rata basis according to respective quantities of tracking instruments requested. 
 
     
     
       25. The method of  claim 21 , further comprising:
 displaying a current market clearing price to the bidders during the electronic auction. 
 
     
     
       26. The method of  claim 1 , wherein the bidders comprise retail bidders. 
     
     
       27. A system for estimating an expense of granting stock options, the system comprising:
 tracking means for providing rights to future payments proportional to a value, if any, actually realized by grantees of the stock options upon exercising the stock options, wherein the rights to future payments are independent of current holders of the tracking instruments such that each current holder of one or more of the tracking instruments respectively receives a pro rata share of a predetermined portion of the net value of the employee stock options actually realized as the grantees of the employee stock options exercise their respective employee stock options; 
 auctioning means for selling the tracking means to one or more bidders through a website for a first market-clearing price; and 
 means for deriving the expense of granting the stock options from the first market-clearing price. 
 
     
     
       28. The system of  claim 27 , wherein the tracking means comprises rules for handling a modification to a first grant of the stock options. 
     
     
       29. The system of  claim 28 , wherein the rules comprise:
 canceling the first grant of the stock options; 
 compensating holders of the tracking means based on a model valuation of the canceled grant; 
 treating the modification of the first grant as a second grant of stock options; and 
 auctioning new tracking means corresponding to the second grant. 
 
     
     
       30. The system of  claim 27 , wherein the tracking means comprises rules for handling forfeitures of the stock options. 
     
     
       31. The system of  claim 30 , wherein the rules comprise:
 providing the bidders with an estimated pre-vesting forfeiture rate for the stock options before selling the tracking means, the rate providing an estimation of a portion of the stock options expected to be forfeited before vesting. 
 
     
     
       32. The system of  claim 31 , wherein the means for deriving the expense of granting the stock options removes the portion of stock options expected to be forfeited before vesting from the derived expense of granting the stock options. 
     
     
       33. The system of  claim 32 , wherein removing the portion of stock options expected to be forfeited before vesting from the derived expense comprises dividing the total proceeds received from selling the tracking means for all of the tracking means by the number of stock options expected to vest. 
     
     
       34. The system of  claim 31 , wherein the rules further comprise:
 during a vesting period, making payments to holders of the tracking means based only on a number of stock options actually vested relative to a maximum number of stock options that could have vested and a number of stock options that are still expected to vest. 
 
     
     
       35. The system of  claim 34 , wherein the payments made to the holders of the tracking means during the vesting period comprise the value actually realized by the grantees upon exercising the stock options, multiplied by a pro rata share of the value actually realized defined by the tracking means, multiplied by a percentage of the stock options that are expected to vest, multiplied by the maximum number of stock options that could have vested had there been no forfeitures during the vesting period, divided by the number of stock options actually vested. 
     
     
       36. The system of  claim 35 , wherein the rules further comprise:
 after the vesting period, adjusting the payments made to the holders of the tracking means to account for a total number of stock options actually vested during the entire vesting period. 
 
     
     
       37. The system of  claim 30 , wherein the rules comprise:
 refunding to holders of the tracking means the price paid by the bidders for a portion of the stock options that are forfeited before vesting. 
 
     
     
       38. The system of  claim 37 , wherein the rules further comprise:
 paying interest to the holders of the tracking means on the refunded portion of the price paid by the bidders. 
 
     
     
       39. A machine-readable storage medium having program code stored thereon which, when executed by a processor, cause said processor to perform the operations of:
 providing derivative securities corresponding to underlying stock options that give holders of the derivative securities rights to future payments proportional to a value, if any, actually realized by grantees of the stock options upon exercising the stock options, wherein the rights to future payments are independent of current holders of the derivative securities such that each current holder of one or more of the derivative securities respectively receives a pro rata share of a predetermined portion of the net value of the stock options actually realized as the grantees of the stock options exercise their respective stock options; 
 electronically auctioning the derivative securities to bidders through a website; and 
 deriving the expense of granting the stock options from a price paid by the bidders for the derivative securities. 
 
     
     
       40. The machine-readable storage medium of  claim 39 , wherein electronically auctioning the derivative securities comprises auctioning the derivative securities on the grant date of the stock options. 
     
     
       41. The machine-readable storage medium of  claim 40 , the program code further causing the processor to perform the operation of:
 delaying the setting of an exercise price for the stock options until the grant date. 
 
     
     
       42. The machine-readable storage medium of  claim 39 , the program code further causing the processor to perform the operation of:
 allowing the bidders to immediately resell their respective derivative securities purchased through the electronic auction. 
 
     
     
       43. The machine-readable storage medium of  claim 42 , wherein reselling the respective derivative securities comprises allowing the bidders to resell their respective derivative securities through the website. 
     
     
       44. The machine-readable storage medium of  claim 43 , wherein reselling the respective derivative securities through the website comprises re-auctioning the respective derivative securities through the website. 
     
     
       45. The machine-readable storage medium of  claim 39 , the program code further causing the processor to perform the operation of:
 determining that the stock options have been modified; 
 canceling the original grant of the stock options; and 
 compensating the holders of the derivative securities based on a model valuation. 
 
     
     
       46. The machine-readable storage medium of  claim 45 , wherein the model valuation is performed by an independent agent. 
     
     
       47. The machine-readable storage medium of  claim 45 , the program code further causing the processor to perform the operation of:
 treating the modification as a new grant of modified stock options; and 
 valuing the modified stock options by auctioning new derivative securities for the modified stock options. 
 
     
     
       48. The machine-readable storage medium of  claim 39 , the program code further causing the processor to perform the operation of:
 providing the bidders with an estimated pre-vesting forfeiture rate for the stock options before electronically auctioning the derivative securities, the rate providing an estimation of a portion of the stock options expected to be forfeited before vesting. 
 
     
     
       49. The machine-readable storage medium of  claim 48 , wherein deriving the expense of granting the stock options comprises removing the portion of stock options expected to be forfeited before vesting from the derived expense of granting the stock options. 
     
     
       50. The machine-readable storage medium of  claim 49 , wherein removing the portion of stock options expected to be forfeited before vesting from the derived expense comprises dividing the total auction proceeds for all of the derivative securities by the number of stock options expected to vest. 
     
     
       51. The machine-readable storage medium of  claim 48 , the program code further causing the processor to perform the operation of:
 changing the rights to future payments in proportion to a difference between the estimated portion of the stock options expected to be forfeited before vesting and an actual number of stock options forfeited before vesting. 
 
     
     
       52. The machine-readable storage medium of  claim 48 , the program code further causing the processor to perform the operation of:
 during a vesting period, making payments to the holders of the derivative securities based only on a number of stock options actually vested relative to a maximum number of stock options that could have vested and a number of stock options that are still expected to vest. 
 
     
     
       53. The machine-readable storage medium of  claim 52 , wherein the payments made to the holders of the derivative securities during the vesting period comprise the value actually realized by the grantees upon exercising the stock options, multiplied by a pro rata share of the value actually realized defined by the derivative securities, multiplied by a percentage of the stock options that are expected to vest, multiplied by the maximum number of stock options that could have vested had there been no forfeitures during the vesting period, divided by the number of stock options actually vested. 
     
     
       54. The machine-readable storage medium of  claim 53 , the program code further causing the processor to perform the operation of:
 after the vesting period, adjusting the payments made to the holders of the derivative securities to account for a total number of stock options actually vested during the entire vesting period. 
 
     
     
       55. The machine-readable storage medium of  claim 39 , the program code further causing the processor to perform the operation of:
 refunding to holders of the derivative securities the price paid by the bidders for a portion of the stock options that are forfeited before vesting. 
 
     
     
       56. The machine-readable storage medium of  claim 55 , the program code further causing the processor to perform the operation of:
 paying interest to the holders of the derivative securities on the refunded portion of the price paid by the bidders. 
 
     
     
       57. The machine-readable storage medium of  claim 39 , the program code further causing the processor to perform the operation of:
 periodically determining a number of stock options exercised by the respective grantees to purchase underlying securities at respective exercise prices; 
 determining the value, if any, actually realized by the grantees of the stock options during a particular period to be an amount by which respective trading prices of the underlying securities at the time of exercise exceed the respective exercise prices, multiplied by the respective number of stock options exercised; and 
 paying the holders of the derivative securities the value, if any, actually realized by the grantees of the stock options during the particular period. 
 
     
     
       58. The machine-readable storage medium of  claim 39 , wherein the rights to future payments are in a range between approximately 5% and approximately 15% of the value, if any, actually realized by the grantees of the stock options. 
     
     
       59. The machine-readable storage medium of  claim 39 , wherein the price paid by the bidders for the derivative securities comprises a single market-clearing price, based on respective bids, at which all of the derivative securities are sold to one or more of the bidders. 
     
     
       60. The machine-readable storage medium of  claim 59 , wherein the respective bids of each of the one or more bidders allowed to purchase the derivative securities are greater than or equal to the market-clearing price. 
     
     
       61. The machine-readable storage medium of  claim 60 , the program code further causing the processor to perform the operation of:
 initially limiting the derivative securities that are provided to the bidders through the electronic auction to a fixed number; and 
 allocating the fixed number of derivative securities by order of priority based on respective bid prices. 
 
     
     
       62. The machine-readable storage medium of  claim 61 , the program code further causing the processor to perform the operation of:
 if two or more of the bidders submit respective bids at a same bid price, each greater than or equal to the market-clearing price, allocating the derivative securities to the two or more tied bidders on a pro rata basis according to respective quantities of derivative securities requested. 
 
     
     
       63. The machine-readable storage medium of  claim 62 , the program code further causing the processor to perform the operation of:
 if the pro rata allocation results in a fractional tracking instrument being awarded to a bidder, rounding the fractional tracking instrument to a whole tracking instrument. 
 
     
     
       64. The machine-readable storage medium of  claim 59 , the program code further causing the processor to perform the operation of:
 displaying a current market clearing price to the bidders during the electronic auction. 
 
     
     
       65. The machine-readable storage medium of  claim 39 , wherein the bidders comprise retail bidders. 
     
     
       66. The system of  claim 31 , wherein the rules further comprise:
 changing the rights to future payments in proportion to a difference between the estimated portion of the stock options expected to be forfeited before vesting and an actual number of stock options forfeited before vesting. 
 
     
     
       67. The method of claim 24, further comprising:
 if the pro rata allocation results in a fractional tracking instrument being awarded to a bidder, rounding the fractional tracking instrument to a whole tracking instrument.   
     
     
       68. The system of claim 27, wherein the auctioning means includes means for auctioning the tracking means on the grant date of the stock options. 
     
     
       69. The system of claim 68, further comprising:
 means for delaying the setting of an exercise price for the stock options until the grant date.   
     
     
       70. The system of claim 27, further comprising:
 means for allowing the bidders to immediately resell their respective tracking means purchased through the auctioning means.   
     
     
       71. The system of claim 29, wherein the model valuation is performed by an independent agent. 
     
     
       72. The system of claim 27, wherein the means for deriving comprises rules for:
 periodically determining a number of stock options exercised by the respective grantees to purchase underlying securities at respective exercise prices;   determining the value, if any, actually realized by the grantees of the stock options during a particular period to be an amount by which respective trading prices of the underlying securities at the time of exercise exceed the respective exercise prices, multiplied by the respective number of stock options exercised; and   paying the holders of the tracking means the value, if any, actually realized by the grantees of the stock options during the particular period.   
     
     
       73. The system of claim 27, wherein the rights to future payments are in a range between approximately 5% and approximately 15% of the value, if any, actually realized by the grantees of the stock options. 
     
     
       74. The system of claim 27, wherein the market-clearing price is based on respective bids and is a price at which all of the tracking means are sold to the one or more bidders. 
     
     
       75. The system of claim 74, wherein the respective bids of each of the one or more bidders allowed to purchase the tracking means are greater than or equal to the market-clearing price. 
     
     
       76. The system of claim 75, wherein the auction means:
 initially limits the tracking means that are provided to the one or more bidders through the auction means to a fixed number; and   allocates the fixed number of tracking means by order of priority based on respective bid prices.   
     
     
       77. The system of claim 76, further comprising:
 if two or more of the bidders submit respective bids at a same bid price, each greater than or equal to the market-clearing price, allocating the tracking means to the two or more tied bidders on a pro rata basis according to respective quantities of tracking means requested.   
     
     
       78. The system of claim 77, further comprising:
 if the pro rata allocation results in a fractional tracking means being awarded to a bidder, rounding the fractional tracking means to a whole tracking means.   
     
     
       79. The system of claim 74, wherein the auctioning means displays a current market clearing price to the bidders during the electronic auction. 
     
     
       80. The system of claim 27, wherein the one or more bidders comprise retail bidders.