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03/22/2006

Expensing Stock Options and the NVCA: Crying Wolf Is Hard To Live Down

Lee Gomes has a great piece in the Wall Street Journal today in which he correctly points out that the world has not come to an end in Silicon Valley despite a government requirement that has forced all public technology companies to start expensing the cost of their stock options.

Like Lee, I went to many events in Silicon Valley where the CEO's of public technology companies gave impassioned speeches about the evils of expensing stock options.  In particular, I remember John Chambers giving a forceful speech against expensing options at the annual SDF Awards one year.  As I listened to Chambers speak I was struck by A) the fact that he was an excellent speaker B) the fact that what he was saying made no sense because in a reasonably efficient market assigning non-cash expenses to stock options that the market already expected to be issued shouldn't really change the value of the company.  Granted, it is a largely superfluous exercise at some level, but as far as I figured if it made public company's board think twice before they dilute their shareholders, it's probably doing more good than harm and might even make stocks go up.

That opinion was not shared by all VCs. Indeed the Venture Capital industry's main trade group, the NVCA, made fighting stock option expensing one of its key legislative initiatives under the theory that what might be bad for the potential acquirers of VC-backed companies might be bad for VCs.

As a VC, I found the NVCA's opposition to options expensing to be both amusing and distressing.  It was amusing because VCs on venture-backed boards generally pay awfully close attention to options grants and are very sensitive to the incremental dilution they represent, so if anyone knows that there is a real cost to options its VCs.  It was distressing because it seemed to me that the NVCA was throwing a huge portion of its political capital behind a battle that was not only intellectually dishonest and superfluous, but was really someone else's fight to begin with.

Fast forward a few years and Gnomes is correct to point out that despite all the doomsday rhetoric the tech/VC world has not imploded.    More importantly, he's also correct to point out that this all ended up being a huge waste of political capital for the tech industry and I would argue for the NVCA in particular.

This is especially true in light of the whole 409A debacle.  409A is a truly mindless government regulation that creates real costs and real problems the directly impact the start-up/VC world, yet the NVCA now finds itself with greatly reduced credibility inside the beltway thanks to crying wolf repeatedly over a law that was only tangentially relevant to its core constituency.  One can only imagine the hill staffers rolling their eyes when the NVCA lobbyists give fire and brimstone speeches about how 409A will kill off venture capital.

Hopefully, 409A is so brain dead and the NVCA has enough credibility left that the IRS will come to its senses, but I fear that thanks to their superfluous opposition to stock option expensing  the NVCA is about to discover that crying wolf on Capital Hill is a tough act to live down. 

March 22, 2006 | Permalink

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