THE IPO THAT MADE EMPLOYEES RICH BEFORE THE PUBLIC COULD BUY THE STOCK
By the time ordinary investors were preparing to buy Google shares, some Google employees were already sitting on fortunes.
Google went public in August 2004.
The IPO attracted enormous attention.
But the most interesting part wasn't only what happened to the founders.
It was what happened to the people who had joined Google before it became a public company.
Many of them had received stock options when Google's shares were still private.
Then the IPO happened.
And suddenly those options were connected to a publicly traded company worth billions.
BEFORE THE IPO, GOOGLE'S STOCK WAS PRIVATE
When a company is private, its employees can't simply open a brokerage account and sell their shares on the stock exchange.
But companies can compensate employees with stock options.
A stock option gives an employee the right to buy shares at a predetermined exercise price, subject to the terms of the plan and vesting.
Imagine an employee receives an option to buy Google shares for:
$10
Years later, Google's public shares trade at:
$100
The employee potentially has:
$90 of value per share
before taxes and other considerations.
The difference between the exercise price and the market price is the option's intrinsic value.
And Google had granted large numbers of these options while it was still private.
THEN GOOGLE WENT PUBLIC
Google's IPO took place in August 2004.
The company used an unusual auction-based offering rather than a traditional IPO allocation structure.
When the shares began trading publicly, a market price suddenly existed for Google's stock.
That changed the economics of the employee options.
A private piece of compensation had become connected to a liquid public market.
Contemporary reporting estimated that roughly 950 to 1,050 of Google's nearly 2,300 employees were paper millionaires after the IPO.
Not because they had suddenly received million-dollar salaries.
Because they already owned — or had options on — pieces of Google.
THE FOUNDERS WERE ALREADY EXTREMELY WEALTHY
Larry Page and Sergey Brin obviously benefited enormously.
At the IPO, each sold approximately $41 million worth of Google stock.
But that was only a fraction of what they continued to own.
Contemporary reporting estimated that each founder's remaining Google holdings were worth roughly $3.8 billion immediately after the IPO.
But the really unusual part was the number of ordinary employees who also had meaningful equity.
Google's IPO prospectus even warned about it.
GOOGLE ITSELF WARNED ABOUT SUDDEN WEALTH
Google's prospectus acknowledged that the IPO could create significant differences in wealth between employees.
That wasn't just a theoretical concern.
Employees had received different quantities of options at different exercise prices and at different points in Google's growth.
Some had joined early.
Others had joined later.
So two people could work in the same building and suddenly have completely different financial situations.
Google warned investors that this wealth disparity could affect employee relationships and the company's culture.
That's an unusual risk to find inside an IPO prospectus.
The company wasn't just preparing for investors.
It was preparing for its own employees becoming wealthy.
THE EARLIER YOU JOINED, THE MORE POWERFUL THE EQUITY COULD BE
This is one of the most important ideas behind startup compensation.
Imagine two employees.
EMPLOYEE A
Joins when the company is worth $1 billion.
Receives options at a relatively low exercise price.
EMPLOYEE B
Joins when the company is worth $20 billion.
Receives options later, when the company's value is already much higher.
Both employees might have impressive jobs.
Both might receive stock options.
But Employee A potentially has much more upside because the options were granted when the company was valued much lower.
That's why early employees can sometimes become wealthy even without receiving extraordinary salaries.
GOOGLE'S PRIVATE VALUATION HAD ALREADY CHANGED DRAMATICALLY
Google disclosed in its IPO filings that its average estimated fair value per share had risen dramatically.
One contemporary analysis of Google's SEC filing noted that Google's average "deemed value" was about $88.13 per share in the first quarter of 2004, compared with an average exercise price of about $16.27 for options granted during that quarter.
That difference represented enormous potential value for existing shareholders and option holders.
The IPO effectively transformed that private-company valuation into something investors could trade.
BUT EMPLOYEES COULDN'T ALL SELL IMMEDIATELY
There was another interesting complication.
An IPO doesn't necessarily mean everyone can immediately sell every share.
Lockups and vesting schedules can restrict when insiders can sell.
Google's arrangements were unusual enough that contemporary reporting highlighted how many employees would gain access to their shares relatively quickly compared with typical IPO insiders.
So there was a strange period after the IPO:
Google was public.
↓
Employees had valuable stock or options.
↓
But different groups had different restrictions on when they could sell.
The wealth existed on paper before everyone could turn it into cash.
THEN THE STOCK PRICE MOVED
Google's IPO price was $85 per share.
The stock closed its first trading day at approximately $100.34.
That immediately increased the value of shares held by employees and other existing shareholders.
And Google's stock continued moving significantly during the months that followed.
Contemporary reporting noted that the stock traded between roughly $100 and $196 during the period from August to November 2004.
So the value of employee equity wasn't fixed.
It could rise.
It could fall.
The "millionaire" label was based on market value, not a guaranteed pile of cash sitting in a bank account.
SOME EMPLOYEES HAD ANOTHER PROBLEM
Sudden wealth sounds like the perfect employee benefit.
But it can create a retention problem.
Google's IPO filing specifically warned that some employees had fully vested options and could potentially cash them out after the IPO.
The company worried that sudden financial independence could reduce employees' incentive to stay.
Think about the logic:
Before IPO:
"I need my salary."
↓
After IPO:
"My stock options are worth several million dollars."
↓
Question:
"Why do I need to keep working here?"
That's a strange problem for a company to have.
Success itself can make retaining employees harder.
AND THE WEALTH WASN'T DISTRIBUTED EQUALLY
Google employees weren't all becoming millionaires.
The size of an employee's potential wealth depended on things such as:
When they joined
How many options they received
The exercise price
Vesting
The eventual market price
Whether they exercised or sold
Contemporary estimates suggested the financial benefit would be substantial for some employees but much smaller for others.
The IPO therefore created a second economy inside Google:
salary
plus
equity
And the second one could become dramatically more valuable than the first.
THIS IS WHY STARTUPS OFFER STOCK
A startup often can't compete with a large established company purely through salary.
Instead, it can say:
"We'll give you equity."
The employee accepts more uncertainty.
In return, they receive potential upside if the company becomes enormously successful.
The arrangement creates an incentive:
Employee works
↓
Company grows
↓
Company becomes more valuable
↓
Employee's equity becomes more valuable
Everyone's interests can become partially aligned.
But the employee is also taking a risk.
If the company fails, the equity may become worthless.
GOOGLE LATER MADE EMPLOYEE OPTIONS EVEN MORE FLEXIBLE
After going public, Google eventually introduced a Transferable Stock Options program.
The company explained that traditional employee options generally could not simply be sold.
Its transferable program allowed eligible employees to sell certain vested options to financial institutions, allowing them to capture not only intrinsic value but also some of the option's time value.
That illustrates an important distinction:
Owning an option
isn't necessarily the same thing as
having cash.
The financial value of the option can exist long before the employee actually converts it into money.
THE IPO WAS REALLY A LIQUIDITY EVENT
Google's IPO didn't magically create all of the underlying wealth.
Much of that value had already been built into Google's private shares and employee options.
The IPO did something different:
It created a public market where that value could be priced and eventually converted into cash.
Before:
Private company
→ valuable equity
→ difficult to sell
After:
Public company
→ observable market price
→ much greater liquidity
That's one of the most important economic functions of an IPO.
THE SAME IDEA EXISTS IN STARTUPS TODAY
The Google story became an early example of something that is now familiar in Silicon Valley.
A startup employee might receive:
Stock options
instead of simply:
Higher salary
For years, those options may be difficult or impossible to monetize.
Then the company:
Suddenly the employee's compensation can become extremely valuable.
But until that event happens, the wealth remains uncertain.
PAPER WEALTH IS NOT THE SAME AS CASH
Suppose you own 10,000 shares.
The market price is:
$100
You can calculate:
$1 million
on paper.
But that doesn't necessarily mean you can immediately put $1 million into your bank account.
You may face:
And if the stock falls to $50?
Your theoretical $1 million becomes:
$500,000
before considering taxes.
That's why the phrase "paper millionaire" mattered in Google's IPO story.
THE BIGGER BUSINESS LESSON
Companies don't only compete for employees with salaries.
They can compete with:
Ownership.
That's fundamentally different.
A salary pays you for the work you do.
Equity can give you a financial stake in what the company becomes.
If the company stays small, the equity might not mean much.
If it becomes Google, the difference can be enormous.
MAACAT PERSPECTIVE
Google's IPO wasn't simply the moment when ordinary investors finally got access to Google stock.
For many employees, it was the moment when years of private equity compensation suddenly acquired a public market value.
The employee who had joined early wasn't necessarily earning an extraordinary salary.
They had something potentially more powerful:
a small piece of the company.
That's why startup equity can be so attractive.
You're not only being paid to work for the company.
You're potentially being paid to own part of what you're helping build.
And when that company eventually goes public, the difference between a stock option on paper and money you can actually sell can become very real.
