When the search engine company Lycos acquired the “Net information service” WhoWhere for a cool $133 million in stock on Aug. 11, most observers chalked it up as just another typical day in Silicon Valley. Corporate evolution in the high-tech economy typically progresses via a convoluted series of mergers, buyouts and spinoffs. As one local expert notes, in the Valley, “you don’t go bankrupt — you get bought.”

But just prior to the Lycos acquisition, executives at WhoWhere — a provider of home pages, people-finding utilities and classified ads — had been offering prospective employees buckets of potentially lucrative stock options and telling them that an IPO, an initial public offering, was imminent.

“They hired a whole lot of engineers, telling them the company is in anticipation of IPO,” says one engineer, who asked not to be named. “They lured a lot of us to go over there and leave our current companies.” Some settled for lower salaries than they could otherwise have demanded.

The engineers were hoping to cash in on Silicon Valley’s favorite get-rich-quick scheme. After the IPO, when WhoWhere stock would have theoretically shot up to stratospheric levels, the engineers would be able to “exercise” their options: to purchase WhoWhere stock at way-below-market prices. But instead, Lycos bought the company — and the WhoWhere employees suddenly learned that their stock options were to be exchanged for stock in Lycos at a ration that was, according to one engineer, “ridiculously low.”

“A bunch of people got screwed,” says the engineer. “There was a lot of yelling and screaming.”

“I can understand how someone could say, ‘I’ve been burned,’” says WhoWhere CEO Dale Fuller. “They look at a Yahoo and think, God, I could be worth $10 billion in a week. The reality is we were very, very fortunate, and we have a win under our belts — we’re now valued at $150 million.”

Fuller says the company had every intention of pursuing an IPO. But then came July’s stock market correction. Suddenly, IPO madness came to a screeching halt — no one was going public. Fuller says WhoWhere decided to make the best of a bad situation and agreed to sell out to Lycos.

Every deal has its malcontents. And in Silicon Valley, where the dream of hitting it big through stock options is cherished almost as an inalienable right, those denied their chance to rake in millions via a public offering might well get agitated. In 1996, according to one oft-repeated statistic, 62 high-tech millionaires are supposed to have been created every 24 hours.

In Silicon Valley, the stock option is how a company attracts and keeps talent — and, of particular importance for cash-strapped startups, how it gets high-priced employees to work for less than they might otherwise accept. And for years, high-tech professionals looking for a big payoff have been willing to pay the price — to take those lower salaries in exchange for option packages, to accept the risk that is at the heart of any startup company’s strategy. Accusations of bad faith aside, the WhoWhere episode is just one case where people bet and lost. Again, just another day in Silicon Valley.

Or was it? According to some veterans, the Valley may be entering a new era — and not just because stock market turmoil has suddenly made everyone older and wiser. Some high-tech professionals appear to be realizing that, in many cases, the stock-option deck is stacked against them.

“There are enough people in this valley that have been lied to that everyone knows someone who thought they were hooked onto a star and who later wallpapered their bathroom with their options,” says “jc” — a software engineer with experience at a number of startups who also asked that his real name not be used.

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Not everyone agrees with the thesis that the Valley is taking a more jaded view of stock options. Experts who make their living structuring compensation plans for high-tech companies say that they have seen little change in the willingness of employees to be enticed into new jobs by option offerings. And one recent study conducted by the National Center for Employee Ownership (NCEO) purports to show that “the over 6 million non-management employees who receive stock options are getting more wealth from these options than previously expected.”

Stock options are here to stay — but that doesn’t always mean that employees who gamble on them have a good chance of hitting the jackpot.

The first dirty little secret about stock options is that the newest wave of companies to go public haven’t turned out to be that good an investment compared to the companies that popularized the stock option in the technology industry — the so-called “class of ’86″ that included Microsoft, Sun, SGI, Oracle and Adobe.

“Most of them perform badly over the long term,” says Doug Henwood, editor of the Left Business Observer and author of the recent book “Wall Street.” “The people who are lucky enough to be in on opening day can make lots and lots of money,” but overall, “they historically under-perform the market.”

One study, by Broadview Associates LLC, found that high-tech IPOs in 1996 — that very year in which all those millionaires were popping out of the woodwork — lost 8.4 percent of their value, in a year when the rest of the market was booming.

One theory suggests that a considerable proportion of recent high-tech IPOs have been for companies with flimsy business plans. Ever since the astounding success of the Netscape IPO in 1995, there has been a frantic rush by wannabe startups to “make IPO” and duplicate the immense market valuations enjoyed by an Amazon or a Yahoo.

“There used to be rules of thumb for the investment bankers who were taking companies public — you had to have so many years of experience before a company could go public, or you had to wait until you had profits. Most of those rules of thumb seem to have pretty much disappeared by now,” says Dennis Beresford, the former board chairman of the Financial Accounting Standards Board — an independent group that in the past has recommended changes in how stock options are accounted for in company earning statements.

The bad long-term performance for high-tech IPOs isn’t the only reason for employees to take a skeptical look at options. Most stock option plans are structured in ways that make it difficult for employees to cash in. The typical option plan only allows employees to exercise their options after they “vest” — and the process of vesting is stretched out over a period of years. Furthermore, most employees of a startup are forbidden from exercising their options immediately after an IPO.

“A lot of shaky companies went public in the last few years,” says Eric Murray, chief scientist at an Internet security firm. “What most people not in those companies didn’t realize is that by the time that the non-executives’ lockout expires — usually six months — the stock price for most companies is well below the IPO price. Only the luckiest of the lucky get a significant amount from an IPO. I realized that at my first startup, where I discovered that a lot of the engineers there had been through an IPO and hadn’t gotten rich, or even a very good down payment for a house.”

“I haven’t seen any general slackening of option fever, though,” says Murray. “And I sure hope that there isn’t one before my company gets staffed up. What I have seen is that fewer people are willing to trade pay for options — now they want both. Makes it hard to hire good people, but it’s great if you’re one of the good people.”

The second aspect of stock-option mania that is beginning to give high-tech professionals pause is the problem of “dilution.” Typically, a startup goes through several rounds of financing before it can either go public or gets acquired by another firm. For each round of financing, it must issue more stock. With each new issuing of stock, the value of the shares that have already been disbursed is diluted: The right to buy 10,000 shares of stock at a buck a share is much more valuable if there are only a million shares, total, than if there are 10 million.

“It used to be that you had some feeling for what your options might be worth,” says startup veteran Doug Wade, a Silicon Valley computer consultant. “If the company did well, made a profit, etc., you would do well. Now you have this weird thing where the company goes public really early, but because there’s so much venture capital your shares are totally diluted, and you can’t sell until all the ‘important’ players have taken their profits.”

“Personally, I’d rather take the cash up front,” says Wade.

Startup veterans who have been burned once recommend that employees considering accepting a stock option package try to find out what the total number of shares is and seek assurances in their stock option contracts that the value of their shares won’t be diluted.

Typically, though, only top executives are likely to be able to insist on “anti-dilution” clauses in their stock option contracts, says Scott Spector, a compensation specialist at the Silicon Valley law firm Fenwick & West. And while the company may tell you how many total shares of stock there are when you join a company, that doesn’t mean anything when the next round of financing rolls around and the company issues more stock.

“I don’t think you can get your offer letter to give you some preferential treatment … unless you are a ‘highly compensated’ employee and the board deems it worthwhile to make an exception to the standard option offering in order to get you,” says “jc.” “I don’t think most startups consider rank-and-file engineers valuable enough to treat them fairly and keep them properly informed in this regard.”

Another crucial factor for job-hopping professionals trying to decide between the lure of the stock option and the security of a fat salary is that the vast majority of startups never “make IPO” at all. Instead, like WhoWhere, they are acquired by another company. And when that happens, the would-be stock option millionaire faces a whole new round of problems.

The most likely outcome is that options are translated via some formula into stock in the new company. The engineers at WhoWhere were outraged when they found that their shares were being exchanged for Lycos shares at a ratio of close to 8-to-1, and that the exercise price on those new Lycos shares was very close to the current market value of Lycos stock. WhoWhere CEO Fuller counters that Lycos compensated the employees by “accelerating” the amount of time necessary for new employees to vest, and by ensuring that all current stock holders became immediately “liquid” — as opposed to locked-out. But that did not assuage the angry engineers, who had to be further soothed by additional grants of stock in late September.

Conversations between Valley professionals in newsgroups and on mailing lists abound with stories of people getting burned when one company buys another. In many cases, instead of having their vesting time accelerated, it is actually prolonged. In other instances, the venture capitalists have provisions ensuring that they get all their money back, with dividends, and the options held by employees turn out to be worthless.

With all these cautionary tales and potential gravy-train derailments,
some software programmers argue that any engineer worth his or her salt should never accept a tradeoff between stock options and salary.

“Any solidly backed startup with a real likelihood of becoming a player will have enough funding to pay wages near market rate,” says Nathan Wolfson, who recently weighed competing offers from several startups. “If a company can’t afford that, it raises serious questions about their intentions and viability. In these days of runaway venture capital, salaries should not be an issue for a serious startup.”

Even though some high-tech professionals are beginning to question the value of stock options, they still have plenty of defenders. Corey Rosen, executive director at the National Center for Employee Ownership, cites three reasons he thinks their popularity will only increase. First, companies that ask employees to “act like owners” will want to reward them for doing so. Second, as long as the labor market is tight, stock options will be a competitive weapon for attracting talent. Third, globalization — and its accompanying downward pressure on wages — has led companies and employees to realize that “owning things is the way to attain wealth, and if they want to attract and retain people, they have to give them a share of the wealth.”

Other factors also work in favor of stock options. Most important, the current method for accounting for stock options makes them a corporate windfall. When options are granted, they are not counted as an expense on profit-and-loss statements — but when they are exercised years later, they can be counted as a tax deduction. As Inc. magazine pointed out in February, if you examine the footnotes in the annual statements for some of Silicon Valley’s newest high fliers, you see that the cost of making good on all their stock options could easily swallow up all their profits. Corporations such as Microsoft routinely spend billions of dollars buying back their own stock so as to be able to give more of it away as stock options. Should the stock market enter a prolonged period of decline, that strategy may prove impossible to sustain.

Proposed changes in how stock options are accounted for were soundly beaten back in 1994 when the FASB floated them. The stock option is just too near and dear to the high-tech economy’s heart.

“A lot of millionaires are being made,” says Fenwick & West’s Spector. “It’s everybody’s dream, and it’s not so much of a dream that people are saying it’s like playing Lotto. There are a lot of people who are very wealthy because of stock options.”

“Anybody who is a sophisticated employee understands there are advantages and disadvantages,” adds Spector. “You don’t have to work for a startup — you can go work for Intel, you can go work for any number of companies and get paid very handsomely in cash. But people don’t want to do that, they want to work for the startups … We’re not talking about people who don’t have choices.”

And even if those people are becoming more gun-shy, that’s a positive development, suggests Rosen.

“People could be more cautious about how they view the options that they are getting,” says Rosen. “They may not have the same views that they had four or five years ago — that options are a sure road to fame and fortune. Now they might think that options are more iffy. But that would be good, if they took a more realistic view.”

A truly realistic view, however, might go further — and ask whether Silicon Valley’s fixation on stock options and making IPO is healthy in the first place. The long bull market has given cover to companies that many observers think are unlikely to have the lasting success of a Microsoft or a Sun. It’s not uncommon to hear of engineers flitting from startup to startup, hoping to time their hops just right, at least once, and make the big killing. That’s the opposite of what the stock option was originally supposed to instill in an employee — loyalty to the organization.

Stock options, says one disillusioned spectator, aren’t about loyalty anymore, or even about ensuring a quality product — they’re about greed.

“It’s a corrupting influence on a company,” says Randy Neal, a software company executive. “When they dangle these options this whole corrupting influence spreads, from the top down. It makes the company culture and philosophy geared more toward the initial public offering than anything else. They are not working on a product or to please their customers except to the extent that they don’t want a black eye. Accounting, engineering, marketing — it is all geared towards ‘Don’t screw up the IPO’ as opposed to ‘Let’s build a good product and serve our customers.’”

The vitality of the Silicon Valley economy has won adherents all over the globe. The exalted status of the stock option is, says Doug Henwood, part of the “euphoria of the capitalist political triumph.” As a corollary, Silicon Valley is often lauded as the birthplace of the most vigorous strain of capitalism yet unleashed on the earth. But is “Don’t screw up the IPO” really the kind of battle cry the Valley wants to be remembered for?

“Everything is going to be fine.” That’s the message that President Clinton has been urgently attempting to convey about the economic turmoil engulfing Asia. But is it? Last week, the 18-nation Asian Pacific Economic Cooperation summit endorsed a $78 billion International Monetary Fund rescue plan that will likely mean severe austerity for a number of economically troubled Asian nations.

Meanwhile, economic analysts have been at pains to assure us that Japan is not on the verge of an economic meltdown, despite the closing of the country’s fourth-largest brokerage firm, Yamaichi Securities, and what appears to be a rather shaky banking system.

Until recently, I wasn’t buying the pandemonium that linked every anomaly to the impending arrival of El Niqo. Then eight feet of October snow fell on Denver, the stock market took a major nose dive and a 5-year-old expansion team won the World Series. Now I sleep in a rubber dingy and brace for the atmospheric Armageddon.

Being on disaster alert is business-as-usual for residents of Southern California. We’ve seen just about everything — which is why the prospect of a new calamity is so seductive to our jaded sensibilities. We’ve also learned that mass destruction has a silver lining. After the ’95 Northridge earthquake, life-affirming casual sex was rampant, longtime neighbors finally met one another and everyone had a perfect excuse not to go to the gym.

“the NASDAQ composite is off slightly from its earlier highs of the session, now up just five and a quarter.” She whispers seductively in my ear. “The Dow, meanwhile, is still surging off the Fed’s announcement this morning that it would not raise interest rates.” She tells me this over and over again throughout the day, as our love grows from just an ember into a solid, passionate flame.

She is Terry Keenan, one of the ever-rotating anchors at the cable business channel CNBC, and I am not ashamed to reveal that I am in love with her. There is no one else I would rather have tell me about the Dow, the Fed, and the S&P than my Terry.