11-12. Ebay, Inc. - Stock Option Plans (A)

9-102-038
REV: NOVEMBER 18, 2005
MARK T. BRADSHAW
eBay, Inc.: Stock Option Plans (A)

As stock market levels fell after the bull market of the late 1990s, the market witnessed a growing
concern by investor rights groups and other corporate governance organizations about the
unprecedented levels of pay received by executives. Among the wealthiest executives was Meg
Whitman, CEO of eBay, whose net worth subsequent to 1998 approached $1 billion, largely from her
ownership of a large number of eBay stock options.1 eBay had seen phenomenal success, both in
terms of profitability and stock price performance (see financial statements in Exhibit 1, and
profitability and price trends in Exhibits 2 and 3). However, a new accounting disclosure required
that companies report what their earnings would have been if they had expensed stock options using
estimates of their fair value. eBay’s disclosure indicated that rather than reporting a net profit of $48
million in the year 2000, it would have reported a loss of almost $91 million if fair values of options
had been expensed. Was eBay profitable or not?
The Company
eBay was formed in September 1995 by Pierre Omidyar. A popular story exists that he started the
company to serve as a central website for his girlfriend to buy and sell Pez dispensers with like-
minded people at no fee (a myth). In a short time after formally starting the website, people were
trading all kinds of items. As the number of users and variety of items increased, Omidyar had to
spend more and more time maintaining the website. In February 1996, he began charging 25 cents
per listing to ease up the use of the site, but this did nothing more than create a huge number of
envelopes arriving to his house filled with checks for small dollar amounts. Within six months of
starting the website, Omidyar had to acknowledge that he had inadvertently started a company. He
quit his job to run the website full time.2 Initially formed as a sole-proprietorship named ‘Auction
Web,’ Omidyar incorporated the company in May 1996 and changed its name to ‘eBay’ in September
1997. With a mission to “to develop a global online trading platform that will help practically anyone
buy or sell practically anything,” eBay went public on September 24, 1998.3 Its initial offering price of
$18 per share soared to $47 3/8 by the close of the first day of trading.
The company, by being profitable since the first full quarter in which it charged listing fees, was
almost unique among internet companies. The company never took possession of items bought and
1 The Associated Press, “The Wealthiest of America’s Wealthy,” September 24, 1999 and The Associated Press, “The Wealthiest
of America’s Wealthy,” September 27, 2001.
2 Kevin Maney, “eBay Erupts Net Auctioneer’s Volcanic Success Looks Unstoppable,” USA Today, February 5, 1999.
3 2000 Form 10-K.

________________________________________________________________________________________________________________
This case was prepared by Professor Mark T. Bradshaw.and was developed from published sources. HBS cases are developed solely as the basis
for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
This document is authorized for use only in Prof. Raman Taneja's Fundamentals of Financial Reporting/PGDMIB at Management Development Institute - Gurgaon from Sep 2024 to Dec 2024.
102-038 eBay, Inc.: Stock Option Plans (A)
sold on its website, thus avoiding procurement, carrying, shipping, and other inventory holding
costs. eBay collected most of its revenue from sellers who paid a small “listing fee” when they
offered items for sale, and a “success” fee when their auction was successfully completed. The
company expanded its revenue base by acquiring various companies that operated in related areas
such as fixed-price auctions (Half.com), traditional live auctions for fine art and other high-dollar
collectibles (Butterfields), and classic cars (Kruse International). eBay’s expenses primarily related to
employee costs, advertising programs, and certain hardware and facility expenditures. The company
believed its competition was both similarly structured online auction websites, as well as all online
and traditional retailers.
Executives at eBay attributed much of their success to the sense of community that existed among
its registered users, which had grown to over 22 million in 2000. Additionally, many observers
credited Meg Whitman for her remarkable leadership since her hiring as CEO by Omidyar prior to
the IPO. Before joining eBay, Ms. Whitman had been working in promotions at Hasbro on the
Teletubbies program. She had also worked in numerous corporate positions at Procter & Gamble,
Bain & Co., FTD, Stride Rite, Hasbro, and Walt Disney. Whitman’s success at eBay had led to
numerous cover stories in business and financial magazines.
Employee and Executive Stock Option Compensation

eBay had grown from one employee in 1995 to 1,927 employees in 2000 (see Exhibit 4). The
company stated that its future success was “dependent on the performance of its senior management
and key technical personnel.” In SEC filings, eBay identified employees as one of its key risk factors.
We are dependent on key personnel. Our future performance will be substantially

dependent on the continued services of our senior management and other key personnel. Our
future performance also will depend on our ability to retain and motivate our other officers
and key personnel. The loss of the services of any of our executive officers or other key
employees could harm our business. We do not have long-term employment agreements with
any of our key personnel, and we do not maintain any ‘key person’ life insurance policies. Our
new businesses are all dependent on attracting and retaining key personnel. The land-based
auction businesses are particularly dependent on specialists and senior management because
of the relationships these individuals have established with sellers who consign property for
sale at auction. We have had some turnover of these personnel, and continued losses could
result in the loss of significant future business and would harm us. In addition, employee
turnover frequently increases during the period following an acquisition as employees
evaluate possible changes in compensation, culture, reporting relationships, and the direction
of the business. Such increased turnover could increase our costs and reduce our future
revenues. Our future success also will depend on our ability to attract, train, retain, and
motivate highly skilled technical, managerial, marketing and customer support personnel.
Competition for these personnel is intense, especially for engineers and other professionals,
especially in the San Francisco Bay Area, and we may be unable to successfully attract,
integrate or retain sufficiently qualified personnel. In making employment decisions,
particularly in the Internet and high-technology industries, job candidates often consider the
value of the stock options they are to receive in connection with their employment.
Fluctuations in our stock price may make it more difficult to retain and motivate employees
whose stock option strike prices are substantially above current market prices.4
4 2000 Form 10-K.
eBay, Inc.: Stock Option Plans (A) 102-038
Stressing the final point, the company also warned, “Our stock price has been and may continue to be
extremely volatile,” due to, among other things, “additions or departures of key personnel.”5 eBay
had adopted a number of stock option plans to attract, motivate, and retain its employees (see
Exhibit 5). Each plan provided for a certain number of options that could be granted under the plan.
As in other companies, e-Bay’s stock option plans had been adopted by its board of directors and
approved by a vote of the shareholders, who were provided information by means of Proxy
statements filed with the Securities and Exchange Commission. The Proxy statements described the
scope and purpose of the plans and a general summary of how the grants were to be determined, the
vesting periods, and other program parameters. eBay’s board of directors’ recommendation in favor
of the 2001 Equity Incentive Plan explained:
We adopted the 2001 Plan to provide a means by which employees, directors and
consultants of eBay and its affiliates may be given an opportunity to purchase our common
stock. We anticipate that the 2001 Plan will assist us in retaining the services of such persons,
in securing and retaining the services of persons capable of filling such positions and in
providing incentives for such persons to exert maximum efforts for our success.”6
Exhibit 6 contains excerpts from the letter provided by the compensation committee to explain the
rationale behind the compensation packages awarded to the company’s executives. Additional
disclosures required annually by the SEC included a summary of total compensation of executive
officers - consisting of salaries, bonuses, and option grants (Exhibit 7).
eBay’s Stock Options Footnote

eBay complied with the intrinsic value method specified in Accounting Principles Board Opinion
No. 25 and the disclosure provisions of Statement of Financial Accounting Standards No. 123. The
footnote disclosure appears in Exhibit 8. The volume of information disclosed in the footnote is
large, but the key disclosure is the pro forma effect of compensation cost on net income and earnings
per share under the assumption that the company followed the fair value method of accounting for
stock options. The footnote also indicates that eBay had granted over 9 million stock options in 2000
and there were over 26 million unexercised stock options at the end of the year, relative to
approximately 260 million common shares outstanding. The extensive use of stock options at eBay is
reflected in the footnote disclosures as large pro forma losses rather than the large profits reported by
eBay. Clearly, the choice between two alternative methods of accounting for the cost of these stock
options has a significant impact on reported earnings.
5 2000 Form 10-K.
6 Proxy Statement filed April 17, 2001.
Exhibit 1 eBay Financial Statements
Source: 2001 eBay Annual Report to Shareholders.
Exhibit 1 (continued)
Exhibit 2 Quarterly Revenues, Gross Profit, and Net Income for 1997-2000
140,000
120,000
100,000
Dollars (000's)
80,000
Revenues
Gross Profit
Net Income
60,000
40,000
20,000
0
7
99
0
97
97
98
99
00
0
99
99
99
99
99
99
99
00
00
19
19
19
19
19
20
0
1
r1
r1
r1
r1
r1
r2
r2
ne
ne
ne
ne
r
ch
ch
ch
ch
be
be
be
be
be
be
be
be
ar
ar
ar
ar
Ju
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em
em
M
M
e
pt
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ec
ec
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Se
Se
Se
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D
D
Quarter Ended
Source: Form S-1 filed July 15, 1998, Form 10-K405 filed March 29, 1999, and Form 10-K filed March 28, 2001. Amounts
prior to March 1999 exclude retroactive restatements for subsequent acquisitions.
Exhibit 3 Stock Price Performance of eBay Common Stock (adjusted for stock splits)
130
120
110
100
90
80
70
60
50
40
30
20
10
0
9/30/98 12/30/98 3/30/99 6/30/99 9/30/99 12/30/99 3/30/00 6/30/00 9/30/00 12/30/00
Source: Created by casewriter.
Exhibit 4 Number of Employees at eBay
2,000
1,800
1,600
1,400
1,200
# Employees
1,000
800
600
400
200
0
1995 1996 1997 1998 1999 2000
Year
Source: Hoover’s Online and eBay Form S-1 filed July 15, 1998.
Exhibit 5 eBay Stock Option Plans
Shares Reserved
Option Plan Date Adopted Original Adjusted*
1996 Stock Option Plan December 1996 5,100,000 30,600,000
1997 Stock Option Plan June 1997 6,000,000 36,000,000
1998 Equity Incentive Plan July 1998 4,500,000 27,000,000
1999 Global Equity Incentive October 1999 2,500,000 5,000,000
2001 Equity Incentive Plan March 2001 10,000,000 10,000,000
* Split adjusted for a 3-for-1 stock split in March 1999 and a 2-for-1 stock split in May 2000
Source: eBay Form S-1, 2000 Form 10-K, and Proxy Statement filed April 17, 2001.
Exhibit 6 Excerpts from the Report of the Compensation Committee of the Board of Directors on
Executive Compensation
Base Salary. Our objective in setting base salary is generally to pay salaries at a level roughly
comparable to the median for similar sized companies (measured by revenue) and to bias cash
compensation towards bonus compensation rather than salaries.
Bonus. The plan for our officers provides for quarterly bonuses split evenly between a bonus
based upon financial targets set by our committee for each quarter and a bonus based on achievement
of quarterly individual goals, so long as a minimum financial target threshold has been met. In
addition, a year end bonus is payable based on the eBay's achievements relative to annual financial
goals.
Stock Options. eBay's stock option plans are designed to provide its employees with an
opportunity to share, along with its stockholders, in eBay's long-term performance. Initial grants of
stock options are generally made to eligible employees upon commencement of employment, with
additional grants being made to pursuant to a periodical focal grant program or following a
significant change in job responsibilities, scope or title. Stock options under the option plans generally
vest over a four-year period and expire ten years from the date of grant. The exercise price of our
option grants has been set at 100% of the fair market value of our Common Stock on the date of grant.
CEO Compensation. In considering Meg Whitman's salary and bonus we not only considered the
factors described above [revenue growth, the successful recovery from the long outage in June 1999
(tempered by the factors that led to the outage), infrastructure development, the continued filling out
of the executive team, and eBay's successful follow-on public offering], but also took into
consideration her accomplishments in reorganizing and increasing eBay's senior management team
as eBay's business expanded is scope and grew in size. Ms. Whitman received a bonus of 41% of her
base salary, as compared to a target of 50% of base salary. In addition, we determined to make an
option grant of 500,000 shares, vesting 50% on May 23, 2003 and 25% on May 23, 2004 and 2005. This
grant, like all of the other follow-on grants made in May and June 2000 to the executive staff, was
cancelled by agreement between Ms. Whitman and eBay after it was determined that the grant might
call into question the desired accounting treatment of eBay's acquisition of Half.com.
Summary. Through the plans described above, a significant portion of our compensation
program for our executive officers (including our CEO) is contingent upon the individual's and the
eBay's performance, and realization of benefits by our CEO and the other executive officers is closely
linked to increases in long-term stockholder value. We remain committed to this philosophy of pay
for performance, recognizing that the competitive market for talented executives and the volatility of
our business may result in highly variable compensation during any given annual period.
COMPENSATION COMMITTEE
Philippe Bourguignon
Robert C. Kagle
Howard D. Schultz
Source: Proxy Statement filed April 17, 2001.
Exhibit 7 Summary of Compensation of Executive Officers
The following table shows certain compensation earned during fiscal year ending December 31,
1998, 1999 and 2000, by the Chief Executive Officer and four most highly-compensated executive
officers (based on their salary and bonus compensation) at December 31, 2000.
Potential Realizable Value

at Assumed Annual Rates
of Stock Price
Appreciation for Option
Term (3)
Number of
Securities
Name and Fiscal Bonus Underlying
2000 Principal Positions Year Salary (1) Options (2) 5% 10%
Margaret C. Whitman 2000 $210,000 $87,914 500,000 18,915,971 41,936,785
President and Chief 1999 195,000 97,500 -- -- --
Executive Officer 1998 145,833 100,000 14,400,000 70,859,972 113,166,618
Maynard G. Webb, Jr. 2000 450,000 503,151 100,000 3,783,194 9,587,357

President, eBay 1999 184,327(4) 108,000 1,000,000 26,579,700 67,082,100
Technologies 1998 -- -- -- -- --
Jeffrey D. Jordan 2000 290,000 136,254 300,000 12,039,402 30,510,207

Senior Vice President
and 1999 64,481(4) 16,323 300,000 n.a. n.a.
General Manager, 1998 -- -- -- -- --
US Business
Matthew J. Bannick 2000 207,250 86,139 140,000 5,296,472 13,422,299

Senior Vice President, 1999 131,106(4) 61,381 260,000 n.a. n.a.
International 1998 -- -- -- -- --
Michael R. Jacobson 2000 190,000 65,139 200,000 7,566,389 19,174,714

Vice President, Legal 1999 160,000 56,000 -- -- --
Affairs, General 1998 52,265(4) 60,000 1,500,012 n.a. n.a.
Counsel and Secretary
---------------
(1) All 2000 bonuses represent amounts paid in 2000 and 2001 for services rendered in 2000, all 1999
bonuses represent amounts paid in 2000 for services rendered in 1999 and all 1998 bonuses represent
amounts paid in 1999 for services rendered in 1998, except for signing bonuses of $108,000 paid to Mr.
Webb in 1999 and $50,000 paid to Mr. Jacobson in 1998.
10
(2) Certain option grants were subsequently rescinded and cancelled by agreement between eBay and the
applicable Named Executive Officer in July 2000.
(3) Reflects the value of the stock option on the date of grant assuming (i) for the 5% column, a 5% annual
rate of appreciation in our Common Stock over the ten-year term of the option and (ii) for the 10% column,
a ten-percent annual rate of appreciation in our Common Stock over the ten-year term of the option, in each
case without discounting to net present value and before income taxes associated with the exercise. The
5% and 10% assumed rates of appreciation are based on the rules of the SEC and do not represent our
estimate or projection of the future Common Stock price. The amounts in this table may not necessarily be
achieved. ën.a.í denotes amounts that are not available in the companyís Proxy statements.
(4) The amounts represent partial year salaries, reflecting the executiveís mid-year start date of
employment.
Source: Proxy Statement filed April 17, 2001.
11
Exhibit 8 Footnote Disclosures Related to Stock Option Plans
NOTE 1 – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Stock-based compensation
eBay accounts for stock-based employee compensation arrangements in accordance with

provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” FASB Interpretation No. 44 (“FIN 44”) “Accounting for Certain Transactions Involving
Stock Compensation – an Interpretation of APB 25,” and complies with the disclosure provisions of
SFAS No. 123, “Accounting for Stock-Based Compensation.” Under APB No. 25, compensation
expense is based on the difference, if any, on the date of the grant, between the fair value of eBay's
stock and the exercise price.
NOTE 14 - EMPLOYEE BENEFIT PLANS:
Stock option plans
The following table summarizes activity under eBay's stock option plans for the years ended
December 31, 1998, 1999 and 2000 (shares in thousands):
Year ended December 31,

1998 1999 2000
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of period 23,580 $0.01 18,493 $1.84 26,236 $29.73
Granted 34,574 1.07 12,210 64.59 9,037 62.69
Exercised (38,954) 0.07 (3,551) 1.95 (4,499) 6.23
Cancelled (707) 0.83 (916) 38.96 (4,525) 65.41
Outstanding at end of period 18,493 1.84 26,236 29.73 26,249 38.99
Options exercisable at end of period 740 0.02 3,654 5.03 7,006 27.73
Weighted average grant date fair
value of options granted during
period $1.40 $105.03 $103.79
12
The following table summarizes information about fixed stock options outstanding at December
31, 2000, (shares in thousands):
Options exercisable at
Options outstanding at December 31, 2000 December 31, 2000
Weighted
average
Number of remaining Weighted Number of Weighted
Range of Exercise shares contractual average shares average
Prices outstanding life exercise price exercisable exercise price
$0.01-$2.33 4,865 7.4 years $1.43 1,968 $1.33
2.50-2.50 5,900 7.7 2.50 2,228 2.50
3.83-53.83 4,368 9.2 43.96 667 44.02
53.88-66.83 3,444 9.2 60.56 521 62.13
66.91-75.19 4,070 8.9 71.07 944 70.38
75.25-116.31 3,602 8.9 86.57 678 85.44
26,249 8.4 $38.99 7,006 $27.73
Fair value disclosures
eBay calculated the fair value of each option grant on the date of grant using the Black-Scholes
option pricing model as prescribed by SFAS No. 123 using the following assumptions:
Year ended December 31,

1998 1999 2000
Risk-free interest rates 4.9% 5.5% 4.9%
Expected lives (in years) 3.0 3.0 3.0
Dividend yield 0% 0% 0%
Expected volatility 80% 100% 115%
Prior to eBay's initial public offering, the fair value of each option grant to employees of eBay was
determined using the minimum value method. Subsequent to the offering, the fair value was
determined using the Black-Scholes model. The effect of compensation cost on net income and
earnings per share are as follows (in thousands, except per share amounts):
Year ended December 31

1998 1999 2000
Net income (loss):
As reported $7,273 $ 9,567 $ 48,294
Pro forma $6,497 ($41,357) ($90,677)
Net income (loss) per share--basic:
As reported $0.07 $0.04 $0.19
Pro forma $0.06 ($0.19) ($0.36)
Net income (loss) per share--diluted:
As reported $0.03 $0.04 $0.17
Pro forma $0.03 ($0.19) ($0.36)
Source: 2001 eBay Annual Report to Shareholders.
13

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9-102-038

REV: NOVEMBER 18, 2005

eBay, Inc.: Stock Option Plans (A)

3 2000 Form 10-K.

Employee and Executive Stock Option Compensation

We are dependent on key personnel. Our future performance will be substantially

4 2000 Form 10-K.

eBay’s Stock Options Footnote

5 2000 Form 10-K.

6 Proxy Statement filed April 17, 2001.

Exhibit 1 eBay Financial Statements

Source: 2001 eBay Annual Report to Shareholders.

Source: Created by casewriter.

Exhibit 4 Number of Employees at eBay

Exhibit 5 eBay Stock Option Plans

1996 Stock Option Plan December 1996 5,100,000 30,600,000

1997 Stock Option Plan June 1997 6,000,000 36,000,000

1998 Equity Incentive Plan July 1998 4,500,000 27,000,000

1999 Global Equity Incentive October 1999 2,500,000 5,000,000

2001 Equity Incentive Plan March 2001 10,000,000 10,000,000

Source: Proxy Statement filed April 17, 2001.

Exhibit 7 Summary of Compensation of Executive Officers

Potential Realizable Value

Maynard G. Webb, Jr. 2000 450,000 503,151 100,000 3,783,194 9,587,357

Jeffrey D. Jordan 2000 290,000 136,254 300,000 12,039,402 30,510,207

Matthew J. Bannick 2000 207,250 86,139 140,000 5,296,472 13,422,299

Michael R. Jacobson 2000 190,000 65,139 200,000 7,566,389 19,174,714

Source: Proxy Statement filed April 17, 2001.

Exhibit 8 Footnote Disclosures Related to Stock Option Plans

NOTE 1 – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

eBay accounts for stock-based employee compensation arrangements in accordance with

NOTE 14 - EMPLOYEE BENEFIT PLANS:

Stock option plans

Year ended December 31,

Fair value disclosures

Year ended December 31,

Year ended December 31

Source: 2001 eBay Annual Report to Shareholders.

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