Human Capital & Careers

Silicon Valley Workers Protest Expensing

While stock-option demonstations roil, a more civilized discussion of accounting principles unfolds at FASB hearing.
Stephen TaubJune 28, 2004

The Financial Accounting Standards Board (FASB) last week took its case for expensing stock options into the hostile territory of Silicon Valley.

The accounting-standards setter hosted a public hearing attended by executives, venture capitalists and other staunch opponents of FASB’s bid to require companies to recognize the cost of providing stock-option compensation as an expense on their income statements.

The meeting took place amid protests in a downtown plaza where some tech workers carried signs that read “Save Our Stock Options,” according to The New York Times.

At least one tech executive spoke of the virtues of options as way of luring talented workers. “Why else would someone leave a large company and take the risk [of joining a start-up firm]?” Andy Bechtolsheim, a founder of several Silicon Valley companies, including Sun Microsystems, asked demonstrators, according to the paper.

Three quarters of the Silicon Valley start-ups that succeeded would have failed if they did not provide top employees with stock options, he reportedly asserted.

“It’s not Silicon Valley fat cats who are going to lose out,” Don Zerio, a controller at semiconductor maker Linear Technology told the paper, “but rank-and-file employees.”

The meeting, however, was reportedly less contentious than the demonstrations. Indeed, the FASB meeting wound up featuring a discussion of accounting principles and how they are applied to the rewarding of options.

Making the case for not expensing options, Donna Dubinsky, a co-founder of Palm, now called palmOne, reportedly said, “The whole debate is based on a false premise.” The cost of options awarded to employees would be “a fictitious expense on the income statement, one that is not related to cash in any way.”

For his part, Andrew Dral, a pension-fund analyst, countered, that a stock option “has economic value. It’s an egregious distortion not to take this into consideration on the income statement.”

One of the biggest issues concerning options is how to value them when their true value may not be known for years. “Stock options might be worth something or they might be worth nothing,” said Kim Polese, a founder of Marimba, a software maker based in Mountain View, California, according to the Times. She added that her Marimba’s stock price has fluctuated between $1 and $60. “To assign an arbitrary value to options makes the financial statements incredibly complex and misleading,” she reportedly said.

In any case, the operating earnings of the Standard & Poor’s 500 would have been 8 percent lower in 2003 had the companies been required to treat options as an expense, the paper reported, citing a Credit Suisse First Boston report.

Round two of FASB’s open meetings will take place this Tuesday on the friendlier grounds of Norwalk, Connecticut, where the board is based.

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