Entrepreneurs and Venture Capitalists Applaud Congressional Involvement
in Employee Stock Option Debate
Start-Up Community Strongly Supports Bills Which Address the Challenges Ignored by the FASB
November 19, 2003 – The National Venture Capital Association (NVCA) and the start-up community today applauded the introduction of the Stock Option Accounting Reform Act of 2003 sponsored by Senators Enzi, Reid, Allen, Boxer, Ensign and Murray because it aims to preserve broad-based employee stock option plans and addresses the serious economic implications of stock option expensing. Although the bill proposes to mandate the expensing of stock options only for the top five executives of a public company, it eliminates the burden of expensing options granted to all employees and protects private entities and small businesses. The NVCA strongly supports the goals of this bill as well as HR 1372 and S. 979 because all three represent growing Congressional recognition that the Financial Accounting Standards Board (FASB) has failed to address the critical challenges associated with stock option expensing.
The Enzi-Reid Bill follows testimony last week by NVCA President Mark Heesen and others to the Senate Banking Sub-Committee on Securities and Investment at which time stakeholders asserted that the actions taken by the FASB threatened to harm small companies. In his testimony, Heesen remarked:
“We believe that Congress has a role in reviewing FASB’s due process system, how FASB determines which businesses will be impacted by its rules, how FASB fields test their proposals, and what the economic and practical impact of FASB pronouncements are on small and emerging businesses, as well as the U.S. economy as a whole.”
The NVCA has a long history of opposing the mandatory expensing of stock options because forced expensing will create a financial albatross for U.S. start-up companies, which rely on options to attract talent to their early stage companies at a time when cash resources are low. FASB’s proposal to mandate expensing of options will leave these companies with no choice but to negatively alter their critical option programs.
The CEOs of small, innovative companies reflect how the expensing of options would impede an entrepreneur’s ability to build a fast growth company.
“Stock options are a critical factor in attracting the kind of people talent needed to build Caspian Networks into a successful emerging growth company. If we had to take an expense for the options based on an arbitrary formula, it would handicap our income statement with a lot of additional expense. As a result, this would increase our breakeven point in profits, increase our cost of capital, and make it harder to recruit the top-notch people needed to build a successful company. And let me remind you that it is the new emerging growth companies that fuel the job markets.
We are competing with established giants like Cisco and Juniper Networks. Not only do we need stock options to recruit people but we need accounting rules that do not undermine and distort what is going on in our company.”
-- Bill Krause, CEO and Chairman, Caspian Networks
“Reactrix is a unique start-up with truly revolutionary technology. The technology is so compelling that I was able to recruit my management team on the promise of "ownership" (realized via stock options), not in addition to cash compensation, but instead of it. My team worked for almost five months with no salary; their options provided the incentive to build the business until we got financed.
If we had to now expense options for the team, we would add an illusionary expense to our income statement, which could affect not only our ability to secure capital in the future, but more importantly, to attract the best and brightest personnel. The plan is ill-conceived and ill-timed, especially now when small business shows signs of becoming the engine that can drive our economic recovery.”
-- Michael Ribero, CEO, Reactrix Systems, Inc.
"There are real issues here of appropriateness and fairness. Reviewing the situation is paramount. However, throwing the baby out with the bath water isn't going to help anyone. Many credit US superiority in technology to options: They, more effectively than any other form of compensation, align the best interests of shareholders and employees. Any schema that doesn't take the uniqueness of this tool into account fundamentally damages the way I can build a business."
-- Royal P. Farros, Chairman and CEO, MessageCast, Inc.
“Stock options allow new startup companies, like Planitax, to attract more experienced management teams during the early stages of development. If we had to expense stock options when they were granted, it would restrict the options pool and make it more difficult to attract the talented employees we need to further build our business."
-- Seda Taysi, President, CEO, and Chairman, Planitax
“Without options, we wouldn't be here! Expensing options inhibits risk-taking. Inhibiting risk-taking limits innovation. Limiting innovation minimizes value creation.... value for BOTH America and the individual. Lionbridge has 2000 employees in over 11 countries, many with options. If we did not have options as part of a cost-efficient compensation fabric, we wouldn't have the leadership team that drove us to be the world's leader in Globalization."
-- Rory Cowan, Chairman, President and CEO, Lionbridge
“Stock options were and are so important to the story and the success of NexTag. Founded in early 1999, we are one of the top comparison-shopping search engines on the Internet. As we like to say “We help you to quickly find the best prices on millions of products sold by online stores, small businesses, and individuals.” Our business concept is quite simple but building a successful business is not.
Although we are doing quite well today, we encountered our share of challenges a few years ago. In the nuclear winter that was the dot-com bubble bursting, several of our key employees cut their salaries. Our critical employees stayed with NexTag because we had hope that our equity stakes, our stock options, and our company would be worth something down the road.
Our commitment seems to be paying off. We have been profitable for eight straight quarters. NexTag was recently named the fastest-growing private company in the Bay Area by the San Francisco Business Times’ 2003 Fast 100. It was also ranked seventh based on revenue growth in the Rising Star list of the 2003 Deloitte Technology Fast 500 for North America.”
-- Purnendu Ojha, CEO, NexTag
The National Venture Capital Association (NVCA) represents approximately 450 venture capital and private equity organizations. NVCA's mission is to foster the understanding of the importance of venture capital to the vitality of the U.S. and global economies, to stimulate the flow of equity capital to emerging growth companies by representing the public policy interests of the venture capital and private equity communities at all levels of government, to maintain high professional standards, facilitate networking opportunities and to provide research data and professional development for its members.
