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.
Everyone should learn stock options. Less risk more reward if done correctly.
lol so true
whatever. stock options are worthless if you’re anything less than executive-level.
What you really mean is that you’ve never managed to get any options that were worth anything. Certainly they are not worthless for many people.
Seems fair, and an interesting strategy on Jobs’ part to keep the top guys. It worked too.
Interesting insights into the early transition of Jobs taking back over Apple.
Yes this was amazing, again this is why TechCrunch is special… Loved this…
Really nice read… (TechCrunch) You guys are amazing…
good read. It’s really interesting to see the relationship between Palm and Apple. Something tells me there is more going on there also with U2 and how they didn’t have a deal for their upcoming tour. There’s also rumors going around that palm has an offer for a 25% increase in pay for any apple employee. There is nothing but bad blood between these two companies. It should be interesting to see when the pre is launched whether apple will sue.
Reading the transcript reminds you that Jobs is human and not a God as you would think he and Bill Gates are.
I wonder how often Jobs, his “top lieutenants” and board considered the dilution all these millions of repriced options had on existing shareholders. Apple’s stock went on to become a ten bagger and no one is complaining but the same thing happens over and over again at so many tech companies.
Lets see:
Apple before Job’s return: dead in water, stocks undiluted toilet paper.
Apple after Job’s return: success wonderland, stocks diluted gold
I agree with Jonathan…
It seemed like it worked.
Everyone should learn stock options. if we do this job in correct way we cab settle our life.
hahahaha! wait, you mean here on earth?
i have friends whose microsoft stock options are underwater. i myself worked as a developer at a VERY large website prior to one of the biggest buyouts ever, and didn’t receive a single option, but those that did got SCREWED royally.
startups use options as a way of paying their employees less than market rate, knowing that employees don’t have enough business sense to understand that the investors and maybe the founders and some upper management are the only ones that’ll make any money. even then, they’re still gambling.
bottom line: if you’re anything below executive level, take salary in lieu of options, and then take whatever extra money you get to vegas. you have a better shot winning big on the slot machines than you do IF your company is wildly successful, AND your options have any value after all the rounds of dilution.
dat’s nice..lol
Nice article. If this was any other company, Jobs would already be in jail or ousted from the company. I don’t believe that he did not know the mechanics of how the options work. This is a guy that took companies public before this happened and knew very well how this process works.
I think that it is interesting how some companies come under fire for doing this (Mercury for instance) and how others just seem to get a slap on the hand (Apple).
Yeah, but does anyone at Mercury have a reality distortion field?
“They weren’t underwater necessarily because of our performance, but, you know, the bubble had burst in the dot-coms”
Actually, to a shareholder, performance and share price are the same. If you are a shareholder-facing executive and you believe the share price of your company is inflated 2x-10x or even more, you should inform the shareholders (carefully). If you don’t inform them, or don’t realize the price is inflated, then your performance is in the same category as those dot-coms being blamed in that quote – you’ve lost people a ton of money through negligence or incompetence, and then you’re going to go back to the shareholders for your just compensation.
This is also a consequence of the deliberate strategy Jobs described of doing large one-time grants. If the grants were spread out over five years then you wouldn’t have all your options underwater unless you’ve been riding the company down for five years.
All that said, evidence seems to show Jobs and his team were indeed doing work that has led to success for Apple – if they couldn’t wait for their options to pay off then they could simply take bonuses, rather than gaming the options (if indeed they were backdated). Until recently I thought boards would be perfectly happy to authorize huge bonuses…
God that’s very entertaining.
Steve Jobs never fails to deliver drama.
Well this post will help the awareness of internet users in the value of stock options.
i likes him. will he give stock optipn for fart app?
I think the private equity firm that is backing Palm and in which Anderson is a partner is Elevation Partners, not Silver Lake. I’m not sure how those got mixed up.
Jobs is a cheating scum but big dogs can get away with it.
aren’t they all?
insider commented: “Jobs is a cheating scum but big dogs can get away with it.”
And let me guess – you’re a Microsoft worshiping, MacSux T-shirt wearing, basement-dwelling, unemployed PC gamer.
“That’s gratitude for you.”
Gratitude doesn’t pay the bills, free the psyche, etc. In this day and age of no pension plans, how many of us have stayed at jobs we didn’t like and/or were ready to leave for new challenges, more money, whatev out of gratitude?
Jim Z: of course he knew how the options worked. As far as business and tech goes, there’s very few equals among his peers, so him playing ignorant made me chuckle.
Pensions, health care, and safety regulation are inefficient. In this globalist economy the trend is toward increasing efficiency at the expense of entitlement. htp://iamned.com/blog/ no need to complain about doom and gloom.
—————-
“That’s gratitude for you.”
Gratitude doesn’t pay the bills, free the psyche, etc. In this day and age of no pension plans, how many of us have stayed at jobs we didn’t like and/or were ready to leave for new challenges, more money, whatev out of gratitude?
Yeah, technotopia, and when those being screwed by the globalist economy wake up, the revolution will be ugly. The plutocrats will cry “class war” and “socialism” and the people who have held the power in their own hands for centuries – but not exercised it with promises of “you can be rich too” – will say, “Yeah, so? The new capitalism beats share cropping.”
Nice post guys. I have to say that I love the Freedom of Information Act.
It’s quite easy to imagine the following scenario:
Jobs: Make XYZ happen. I don’t want to know how you do it, but make it happen.
Underling: Yes, sir.
Jobs: Good. Report back to me next week when you’re done.
Underling: What a nice turtleneck you have!
So, yes, Jobs is shrewd. So shrewd that he made sure he didn’t know what *actually* happened, though I’m sure he had some notions. But even still he could honestly say he didn’t know what happened.
Unless Jobs specifically indicated he wanted something illegal done, then the assumption on Heinlein’s and Anderson’s part should have either been, “Steve, this is illegal” or “Steve, we can only go this far.” They did neither, and the Apple haters blame Jobs.
The SEC, which is lazy about prosecuting anyone has prosecuted those who are to blame. To talk like YOU knew what was happening is pure bunk and beneath contempt.
Best joke from the deposition, around noon:
Question: Did the board of directors of Apple in fact meet on August 29th, 2001? If that’s identified in minutes, would it be your assumption that that’s an accurate statement?
Steve Jobs: Well, what I have since learned in that last yearn surrounding events at this wouldn’t necessarily reassure me of that.
“While he was taking care of his top lieutenants by trying ti”
Did you mean “While he was taking care of his top lieutenants by trying to”?
(Please feel free to delete this post anytime. :) )
good
hg
Steve Jobs fooled Steve Wozniak over the Atari deal: $600 instead of $6000.
http://en.wikip...wiki/Steve_Jobs
Wozniak only got $300.
Yeah, Jobs was a real piece of work back then. Woz forgave him for it. Have you?
this is very good article I think the private equity firm that is backing Palm and in which Anderson is a partner is Elevation Partners, not Silver Lake. I’m not sure how those got mixed up.
It was very cool to read Mr. Jobs comments in the transcript from the SEC testimony! Thanks!
If you read deposition carefully, you will notice that Jobso was “playing stupid” a bit. I don’t think that anyone in the tech community would believe the claptrap about interim-ceo vs. pixar-ceo. Jobso views apple and pixar as his own property (because he built them :)
The key line is “That’s gratitude for you.” :)))))))
That version of history has to be reconciled with the version told by Gil Amelio and others. They’re sort of wildly different. There’s no mention of the fact Jobs sold his entire Apple portfolio up to the July 4th weekend and got the Apple board furious for deliberately causing a run on AAPL. And that’s a matter of public record. Jobs double-crossed Amelio. He beseeched Amelio for months to put in a good word for him with the board. Amelio reminded him that he still wasn’t very popular with the board. That fairy tale about roaming around and trying to help is only because Jobs of all people from NeXT was not offered a substantial position (nor cash for the acquisition – everybody else got cash but not him). Both Rubinstein and Tevanian immediately became heads of hardware and software respectively but by board decision Jobs became head of nothing. Anybody who accepts Jobs’ story at face value is an illiterate fanboy fool.