Long lunches are usually not the norm for SiliconValley's denizens, but many made an exception Thursdayto join the battle over stock options.
Wearing yellow T-shirts with"www.savestockoptions.org" splashed across theirbacks, hundreds of high tech and biotech employeeschanted against expensing stock options at a lunchtimerally in front of City Hall in Palo Alto, Calif.
"You are the face of employee stock options!" JimCunneen, president and CEO of the San Jose SiliconValley Chamber of Commerce, shouted over and overagain throughout the one-hour rally. "Yes we are!"replied the crowd, echoing the slogan on the fronts oftheir shirts.
The rally was organized by TechNet, a network of200 CEOs and senior executives in the high-tech andbiotech industries. Employees from start-ups such asVisionael as well as more established tech companiessuch as
talked upoptions as an important engine for innovation, hardwork and entrepreneurialism. And they described direconsequences for the high-tech sector and entire U.S.economy if companies are forced to expense options.
"Innovation is built on stock options," declaredAndy Bechtolsheim, the cofounder of Sun Microsystems.Expensing stock options would move Silicon Valleybackward to its history of orchards, if not the StoneAge, according to Bechtolsheim, who recently returnedto the company as senior vice president and chiefarchitect for volume systems.
The rally coincided with a roundtable meeting helda mile away and called by the Financial AccountingStandards Board to discuss its contentiousproposal to require companies to
expense stock options.
FASB, a quasi-public group that regulates theaccounting industry, has proposed that companies beginexpensing stock options next year. The organization isexpected to adopt a final rule requiring optionsexpensing in the fourth quarter; FASB members werevery tight-lipped Thursday about their timeline.
For the high-tech employees holding signs that,for example, read "Silicon Valley: The house thatoptions built," options represent a down payment ontheir first house, college tuition for their childrenand a reward for late nights working at a start-up.
"Without it I wouldn't be able to do a lot ofthings for my family that with stock options I'm ableto do," said Suzane Gemme, 34, who has three kids andis one half of a dual-income family.
Like others, Gemme, an executive assistant to theCFO at
, said her main complaint is againstexpensing options centers on the difficulty of valuingthem. It's unfair for companies to take a charge onoptions when some of them are worthless becausethey're under water, meaning that their exercise price ishigher than the stock price, she said.
It was this very point, among other technicalaccounting issues, that was debated among 32participants at the FASB roundtable discussion nearbyat the Palo Alto Sheraton, where the number of peoplein the audience was roughly the same size as thenumber of participants in the discussion.
Current accounting rules allow public companies tochoose whether to expense options. But theleniency of that rule has come under fire followingaccounting scandals at
, among others.
There was strong agreement among the group thatemployee stock options are a form of compensation. Butthe usual suspects -- including
CFO Andy Bryant,
CFO Dennis Powell,
CFO Ken Goldman and
CFO Richard Grannis --argued otherwise.
Shareholders incur the cost of that compensationin the form of dilution as the options are exercised,the executives argued. Thus, options should not beincluded as an expense on the company's incomestatement.
Grannis noted that Qualcomm, widely viewed as asuccess story, discovered it would have reducedretained earnings by several billion dollars hadit expensed options since its founding. Qualcomm wouldhave been viewed as a "miserable failure," the companyprobably would have had trouble raising money, andstockholders and employees would not have made money,he said.
When asked about that scenario later in a pressconference, FASB member Mike Crooch appearedunimpressed. "OK, that's nice. That would have been atrue reflection," he said.
Meanwhile, Intel's Grove noted that he sits on theboard of a start-up that pays its lawyer with options.Paying that employee with stock options instead ofcash extends the life of the company an extra twoweeks, he noted, echoing comments at the rallyearlier.
Grove and others also stressed the complexity ofestimating the cost, noting the difficulty offorecasting future stock volatility -- one factor incalculating option costs -- and tracking exercisebehavior of thousands of employees around the world.
Grove also raised what he called his "civil caseissue" of having to sign off every quarter onestimates on stock option costs that he believes arenot reliable.
Securities and Exchange Commission
chiefaccountant Don Nicolaisen assured him the agency wouldestablish implementation guidelines and safe harbors.
One proponent for expensing was Jane Adams, amanaging director at Maverick Capital, who saiddilution alone is an inadequate way to account forstock options. "Get on with it," said Adams, whocalled for a final standard on expensing by September.Stock option compensation "is an expense," she said."Put it on the income statement."
Crooch also said an effort in Congress to derailFASB's proposed rule would "set a very bad precedent"that trades good accounting for other public policygoals. "Good accounting is a public policy goal," hesaid.
Such arguments seemed unlikely to win overthe crowd, yellow t-shirts and all.
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