Steve Jobs On The Value Of Stock Options

On March 18, 2008, Steve Jobs was deposed by the SEC during its investigation of Apple’s stock option backdating scandal. The deposition was never made public until Forbes published it on Friday, after obtaining it through a Freedom of Information Act request. (Full deposition embedded below)

Jobs explains his reasoning for why he asked the board for mega grants of options for both himself and his top executives, but claims ignorance of the mechanics of how that was done after the board approved the grants themselves. (It was the falsifying of board minutes for a meeting that never occurred, not the backdating per se, that got Apple’s former general counsel Nancy Heinen into hot water with the SEC—this deposition was for a case against her). There aren’t too many revelations on the legal front in the document.

But the document provides the first detailed account of the incident from Steve Jobs himself in his own words. What comes through in the deposition is how Jobs sees himself and his’ fierce loyalty to those who work for him. For instance, after selling NeXt to Apple in 1997, his initial reason for acting as a consultant was to get “some of the NeXt people into some jobs where they could help Apple.” He himself was reluctant at first to take on the CEO role at Apple because he didn’t want the people at his other company, Pixar, to “think I was abandoning them.”

Then when it came time to reward his “ultra key” executives with one million options each, two of them were from NeXT. While he was taking care of his top lieutenants by trying ti “surprise and delight them with what a career at Apple could be”, he was “hurt” that Apple’s board didn’t do the same for him. So he had to have a little talk with them about swapping his 20 million then-underwater options for 7.5 million new ones, which they did.

I’ve excerpted some of the juicier bits from the deposition below. Some names were redacted in the original, but I’ve reinserted them in brackets where it is obvious who Jobs is talking about I’ve also bolded some parts for emphasis. (In the transcript, “A” is Jobs).

1. On coming back to Apple and becoming CEO in 1997:

Q: And I guess, just to go back in time then, I want to just try to understand a little bit the transition from having the title consultant to becoming CEO. Could you just describe that transition for me?

A: Well, when Apple bought NeXT, Apple was pretty messed up. It was pretty easy to see. And I was trying to help in my arm’s length role. I was trying to help Apple by getting some of the NeXT people into some jobs where they could help Apple, and that’s pretty much all I was doing.

. . . Q: Okay, Did the board in fact fire [Gil Amelio] the following week?

A: Yes.

Q: And did you take on the role then as CEO?

Jobs: Well, no, I did not. I was very concerned that Pixar was a newly public company with shareholders, employees, and I felt that – – to my knowledge there had never been a CEO of two public companies before. So I felt if I took the job, the Pixar shareholders and employees would think I was abandoning them.

Q. Mm-hmm

Jobs. And I decided I just – – that I couldn’t do that. So I took the title of interim CEO and agreed to come back for 90 days to help recruit a full-time CEO.

Q. How did that recruitment effort go?

A. I failed.

Q. And when you say you failed, is it that you didn’t find anyone that you thought would be suitable to take on the role?

A. Yes. Apple was not in good shape and everybody knew it and the kind of candidates that we were being offered up by the headhunters were not very talented.

Q. Okay. In other words, not the sort of people who could turn Apple around?

A. Yes.

Q. Okay. So after that 90 days, what happened next?

A. Well, it just kind of slid into the fact that I stayed. I kept the interim CEO title for quite some time, a number of years.

2. On the origins of the 4.8 million-share mega grant to Apple’s top executives:

A. Apple was in a precarious situation in that we’d, you know, had the internet bubble busting, and I thought that Apple’s executive team and the stability of Apple’s executive team was one of its core strengths. And I was very concerned because Michael Dell, one of our chief competitors, had flown Fred Anderson, our CFO, down to Austin, I guess, him and his wife, I think, to try to recruit him. And I was also concerned that [REDACTED] and [REDACTED] two very strong technical leaders, were also very vulnerable.

So I was very concerned that Apple could really suffer some big losses on its executive team with the business environment we were in and the competitors coming after our people.

. . . Well, I talked with the board almost every meeting about, you know, key personnel, because I think that’s the key asset Apple has, is its talent

. . .

Q. All right. And who did you consider to be these ultra key people?

A. [Timothy Cook] who at the time I think was our Executive Vice President of Operations, maybe sales and operations, actually. Fred Anderson, our CFO. [Jon Rubinstein] head of hardware. [Avi Tevanian] head of software.

Who am I forgetting? I think those were the four key ones.

Two of those ultra key people, Rubinstein and Tevanian, came from NeXT. Jobs helped them get hired by Apple after the sale of NeXT in the first place, and then rewarded them down the line with options on one million shares apiece. Today, Rubinstein is competing against Apple in his role as the executive chairman of Palm, which is backed by Silver Lake Elevation Partners, where Anderson is a partner. That’s gratitude for you.

3. On the question of whether Apple was trying to pick a grant date for the options to maximize the return to the executives, Jobs tries to dismiss how important a role that played in the process.

Q. And sort of in this framework of options being, in part, a retention tool, is the idea to try to get a lower price so that there is the potential to maximize one’s profits on the options?

A. You know, this has come up before. I have to tell you, for these options to be worth anything, the stock has to go up so much compared to a dollar or two at the beginning . . . And so if these guys were going to realize the kind of money they could make elsewhere by staying at Apple, you know, they were going to have to make tens of millions of dollars. These guys are really senior guys. Several of them, you know, could be CEOs of a few big companies and a few medium-size companies.

So for them to realize that kind of a gain here, it’s a lot more than a small variation in a strike price.

Nevertheless, with one million shares each, every $1 increase translated into a $1 million gain and a million dollars is still a million dollars. But Jobs wasn’t just rewarding his lieutenants, he was trying to keep them. The “mega grants” were designed to be one big grant instead of smaller grants every year.

4. Jobs explains the reasoning behind his compensation strategy:

One of the things that I felt was that rather than giving them shares once a year, as is common in some companies, I would rather give them four years’ worth of stock upfront. . . . the key thing is if the stock goes up, which we always hope it does, then the golden handcuffs are dramatically increased, which is what I was hoping would happen.

And on the subject of his own grant of 7.1 million options at the time, Jobs says that he negotiated so hard for it because he felt he wasn’t getting the recognition he deserved:

Q. Could you just tell me a little bit about the process of how this all came to be?

A. Well, it was a tough situation, you know. It wasn’t so much about the money, because a very small percentage of my net worth is from Apple.

Q. Okay.

A. But everybody likes to be recognized by their peers, and the closest that I’ve got, or any CEO has, is their Board of Directors. And as we’ve seen in the discussions of the past hour, I spent a lot of time trying to take care of people at Apple and to, you know, surprise and delight them with what a career at Apple could be – – could mean to them and their families. And I felt that the board wasn’t really doing the same with me.

Q. Right.

A. So I was hurt, I suppose would be the most accurate word, and, you know, the board had given me some options, but they were all underwater. They weren’t underwater necessarily because of our performance, but, you know, the bubble had burst in the dot-coms, and here I had been working, you know, I don’t know, four years, five years of my life and not seeing my family very much and stuff, and I just felt like there is nobody looking out for me here, you know.

Q. Right. Okay.

A. So I wanted them to do something and so we talked about it.

Steve Jobs Deposition