Back in the day, smart young people rallied to the cause for Internet start-ups. They were willing to accept meager salaries, not just for the thrill of the hunt, but also for the promise of treasure: fistfuls of stock options to which Wall Street might someday assign outrageous values.

But Wall Street has sent a new message to the Dot Communists: Your treasured options are worthless. The downturn in Internet stocks has devalued untold millions in employee stock options, dissipating daydreams of Beemers and Benzs. Analysts and recruiters say employees are starting to abandon public Internet companies. To make matters worse, a new rule from the

Financial Accounting Standards Board

makes it increasingly difficult for Net companies to reprice those employee options.

"The mobility of the Internet workforce," warns David Readerman, director of Internet strategy at San Francisco investment bank

Thomas Weisel Partners

, "is about to cut the other way."

The pain at these companies is severe. While

TheStreet.com Internet Sector Index

, which tracks 20 Internet stocks, has fallen 32% since its recent high on March 9, many individual dot-com stocks are off much more.

e-Stamp

(ESTM)

,

Fogdog

(FOGD)

and

Webvan

(WBVN)

are off roughly 60%, 61% and 52%, respectively, in that time frame.

Falling Prices

In addition, plenty of Internet companies that went public in 1999 and so far this year are well below their IPO prices. Even in the best-performing sector, information technology services, 68% of the 1999 IPO class is trading below it's offering IPO price, Readerman says.

How Worthless Are You?
% of stocks below IPO price.

Source: Thomas Weisel Partners LLC

That dyspeptic trend has employees at some of these firms re-evaluating their options, literally. "In the last eight weeks, our candidate flow has increased exponentially," says Becky Stein, who heads the consumer Internet practice at recruiter

Russell Reynolds Associates

in San Francisco. "People are suddenly returning calls and are willing to talk. We have expanded our candidate pool by about 30% to 50%."

Falling share prices, of course, are nothing new to Wall Street. It used to be that a corporate board would just lower the price on those options. If a CEO was hired with options priced at 10 a share, only to see the share price fall to 5, the board would simply reprice that options agreement, lowering the share price to 5 (and giving the CEO a second shot at that

Gulfstream).

But that old strategy is unlikely for dot-coms, for at least two reasons. First, investors have erupted with fury to the repricing of options for corporate executives at companies like

Apple

(AAPL) - Get Report

and

Network Associates

(NETA)

. As Wall Street sees it, insiders are being rewarded for failure, while investors are left holding the bag.

"When they reprice, they're looking out for themselves and not shareholders," says accounting watchdog Jack Ciesielski, who publishes the

Analysts Accounting Observer

.

Second, a new FASB rule is about to add a significant burden to companies that might otherwise have repriced. The old rule said that repriced options didn't have to be counted as a compensation expense. Investors hated this. Indeed, the entire issue of tricky accounting for options irked Wall Street and has drawn the attention of no less than

Warren Buffett

, who addressed it in a letter to

Berkshire Hathaway

(BRK.A) - Get Report

shareholders last year. "In effect, accounting principles offer management a choice: Pay employees in one form and count the cost, or pay them in another form and ignore the cost," Buffet wrote. "Small wonder then that the use of options has mushroomed. If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?"

New Rules

Thanks to concerns like that, the rules have changed. In March, the FASB issued "FASB Interpretation No. 44 of the Accounting Practices Board Opinion 25." It said that any options repricings since Dec. 15, 1998, would be counted as an expense on the company's income statement starting July 1. That means that earnings-free companies burning cash will lurch even more uncertainly toward profitability. "With this rule, a company that might have earned 20 cents in a quarter might earn just a penny," says Readerman. "It's going to take longer for these companies to turn the corner to big earnings."

What does this mean for Net stocks? Three things: First, repricing is out, so some employees will bail. Second, for those brave companies that have repriced -- like

barnesandnoble.com

(BNBN)

and

CDnow

(CDNW)

-- their stocks could be even more out of favor with the Street. Third, the new accounting rules mean that companies will have to spend more to keep talent: They'll have to pay for repriced options, or pay higher salaries to keep their teams together.

And the exodus will continue. "We certainly don't want to see our equity interest in these companies diluted by repricing," says Steven Appledorn, whose

(MNNAX) - Get Report

Munder NetNet fund holds some $3.79 billion in Internet stocks. "But it's a double-edged sword; we don't want to see the underlying businesses diluted by a brain drain."

It makes you pine for the good old days, when the bricks-and-mortar guys used to worry about brain drain.

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

cjohnson@thestreet.com.

For more columns by Cory Johnson, visit his column

archive.