Perspective, Pontification and Propoganda about Entrepreneurship and Venture Capital, brought to you by David Hornik of August Capital.

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Barnaby James

The survey was done of Public companies which (apparently) cannot take the earnings hit -- although it's all paper money anyway so it's more of an investor relations problem more than anything else. Startup companies are generally unprofitable when they are making the big options grants and more concerned with revenue growth than earnings. It's been my experience that the VCs are acutely aware of (and have much more control over) how employee stock grants are diluting the company.

So it seems like this trend would favor the startup over the public company. The article also seems to indicate that public companies are favouring fewer employee grants while retaining the executive grants which was the entire problem with options in the first place. Presumably any company that is foolish enough to follow through on this will be suitably punished by the market.

Stewart Noyce

I agree that stock options expensing will have a profound impact on tech companies. The bigger public ones may have a much more difficult time attracting and retaining the talent that can perform at a superior level AND is willing to accept career risk.

To the extent a public tech company still has a growing market in which to operate this will increase the possibility that smaller startups will introduce innovative new solutions to fill in the gaps. In this scenario, the IPO market suffers the most. M&A will rule the day. Smaller companies can't reasonably grow into bigger ones if the talent bails after the IPO.

In response to Barnaby James, a recent presentation by the National Venture Capital Association (NVCA) to FASB (Aug 13, 2003 Public Policy link on highlights the impact of FASB policy on pre-public companies, see especially pages 14-15. So, it appears to be a significant issue across the board.

Tubby Bartles

This post actually can't be true by definition.

There are only two possible scenarios: you believe financial markets are efficient or you don't.

If you believe they are inefficient, then you think that expensing options will have an impact on the perceived value of a company. If that's the case, there is no question but that options should be expensed -- after all, you are saying that the expense was hidden from investors before, since they are only using the mandated accounts for their valuation decisions.

If you believe they are efficient, then investors were already taking the options value into account. In that case increased scrutiny would not cause any less options to be issued, since investors were already correctly pricing them and they would have no result on investor perceptions.

In other words, if you believe the markets are very inefficient then you should be FOR expensing. If you believe they are not, then you shouldn't care.

Dave's implication is that this is evidence that the markets are inefficient. There is another explanation I think is more likely: markets are reasonably efficient, and less options are being issued because employees value them less. After all, everybody thought they had a winning lottery ticket during the boom times, but now they are completely discounting options when evaluating packages. They are falling back to their appropriate role of properly incenting employees after they arrive (which means less of them) rather than substituting for cash in an offer.

Relax, Dave...the end of the world isn't near -- it's just coming back to reality.


Hard to believe that anyone still believes this nonsense. We learned in the boom time that ISO programs were designed to enrich the 'first few guys' at venture-funded companies that the FFG knew would fail.

The interests of senior management were not aligned with those of the option-incented workforce, because management invariably manipulated (or worked to liquidate) the company in order to monetize their own options quickly, while the rank-and-file labored under the delusion that 4 year vesting would produce wealth from any operation not likely to be acquired by Cisco.

Far more engineers made a living from day-trading and IPO speculating than got rich exercising options in their own company. Anyway, who cares if companies are forced to compensate people with real money and/or better working conditions?

Jeff Hicks

Is it to late to buy a bunch of call options on an Internet index before the rest of the World figures out the effect Google going public will have?

Jordan Spizike

I agree. If enough were created to support a large footprint, it would outstrip the natural gas supply and it would create higher gas prices. I would probably put the gas supply at risk, and that would have an impact in home heating. now link my name to know me,and each other we all get the good things.don't think that I cheat you,pls.

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