Silicon Insider: A Defense of Stock Options

The result was public protests and rallies in Silicon Valley and in other tech enclaves around the country. Not only were companies against expensing options, so were the employees themselves. In the end, the American Electronics Association, working with Sen. Joseph Lieberman, crushed the FASB plan.

Silicon Valley assumed the fight was over. But FASB and the SEC never forgot. And last year, with the stock market down and corporate scandal in the air, they struck again.

Now they had a new ally: high-tech workers. As long as the going had been good, tech's rank and file had been the biggest defenders of options. Now that those options were (for the moment at least) worthless, they were willing to ransom their future for some quick cash now.

Some of this was understandable. When you can't make your mortgage, you'll happily trade your chance at riches ten years from now for a few bucks today.

But even as you rationalize that decision, the larger truth is that it is a foolishly short-sighted choice. Without options, high tech becomes as hierarchical and undemocratic as those old smokestack industries it was designed never to become. The digital world becomes forever stratified, with senior executives getting their high salaries AND stock, and everybody else drawing wages.

But that's not the worst of it. The real disaster in ending easy stock options is that it will quickly kill entrepreneurial start-ups, the dominant force for economic health and job creation in this country. Without options, how can an inevitably cash-poor new company ever recruit the kind of talent it needs to succeed?

The Democratic Option

Is anyone is Washington thinking about any of this? They sure are on Silicon Valley.

A few nights ago, uber-venture capitalist John Doerr got up at a local gathering and angrily denounced the FASB plan as a threat to the very future of electronics. He won't be alone: tech executives were as depressed and intimidated as anybody by the downturn and scandals of the last couple years.

But now, as the economy begins to stumble back, the execs are going to come out fighting. As I write this, Cisco just announced that, had it expensed stock options, its most recent quarterly profits would have been cut by 60 percent.

Meanwhile, the Feds are couching their case as one of fairness. After all, goes the argument, why should tech companies be able to keep options off the books, while old line companies don't get the same break? Um … maybe because 1) Giving out stock options is morally good; 2) It's fairer, more democratic, and better for the economic health of this country; and 3) Because no one really knows how to expense high tech stock options.

That last is one thing the Feds don't like to talk about. Just like last time, FASB has hauled out an arcane statistical technique called Black-Scholes that is supposed to provide an accurate estimate of what a given company's options will be worth. The nasty little secret is that Black-Scholes doesn't really work in a dynamic entrepreneurial environment in which a handful of companies become superstars and the most of the rest die without ever vesting their options. It will prove to be at least as 'unfair' as the current systm; but — and this is why the accountants like it — it will at least put some kind of number on the balance sheet.

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