VMware, Inc. (NYSE: VMW) is using a method of making employees whole on their stock options that are currently under water. 

The company submitted a filing outlining this plan.  Its board of directors has approved a proposal to exchange employees’ post-IPO out-of-the-money stock options, but this has to be approved by stockholders and the company is scheduling a special meeting to gain that approval.

All U.S.-based non-executive employees of VMware holding stock optionsgranted after the IPO will be able to exchange their out of the moneystock options for an equal number of new options.  non-US employeeswill be granted a to-be-determined proportionate number of restrictedstock units after the exchange offer for U.S. employees is completed.

Participation is voluntary and the exercise price of the new optionswill be the stock price at the close of trading on the day immediatelyfollowing the date that the exchange is completed. The exchange willrestart options’ vesting schedule, which means some employees who werebiding time to the vesting date might not participate depending upontheir goals. Executive officers of VMware will not be eligible toparticipate.

As long as EMC Corp. (NYSE: EMC) is on board with this initiative, youcan consider this a done deal as it is majority owned by EMC.  Thiswill likely result in additional charges on a GAAP basis under newrules, but we won’t try to calculate that ahead of time without knowingthe specifics.

With shares at $39.00 and down from well over $100.00 after its IPO,you can bet that many of the stock options issued over the last yearare under water.  Its post-IPO (nearly 52-weeks) trading range is$36.51 to $125.25.

Jon C. Ogg
July 17, 2008

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