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Get Rich Quick: The fight for stock options has been presented as a way for the working class to reap profits from Wall Street.

Stocks Still An Option

Feds move to derail valley gravy train

By DK Sweet

IT'S NOT OFTEN CONGRESS spends time on something that really matters to the hardworking folks here in the Silicon Valley. But when our local congressional delegation takes a stand against a bunch of bean counters who want to pass questionable rules designed to reduce a typical valley guy's chances of getting a date, it makes me proud to be a taxpayer.

The conspirators here, the Financial Accounting Standards Board, claim to be upholding truth, or what passes for truth among people hired to massage the numbers to make corporate officers look like geniuses. The Standards Board believes that if your chief financial officer is forced to treat stock options like real money, then truth, justice and the vitality of the American economy will be restored. That's what happens when companies like Enron and Worldcom practice evasive accounting practices.

What are stock options? Basically, an opportunity, or an option, offered to employees to purchase shares of a company's stock at a predetermined bargain price. "Exercising" options means buying the stock at that bargain price and selling it at the current or future—and hopefully much higher—market price. It's somewhat like being offered the chance to exchange $5 some day for $10, $20 or—if you were an early Cisco employee—$1,000.

But options can be even better than cash in a couple of ways. First, they allow employers to give employees something of great potential value without spending real cash. Startups love stock options because workers can be enticed to leave an established multinational for the chance to hit the jackpot at a fledgling company. Employees, on the other hand, become highly motivated to turn that potential value into real money. How? By working hard to ensure the value of the company's stock far exceeds the price when the options were issued.

The Standards Board, which held a meeting with tech-industry execs in San Jose last month, has been stymied for two years in changing stock-options-reporting rules by the Big Four accounting firms and Securities and Exchange Commission chairman William Donaldson. The board believes the right to purchase stock should be treated like giving out cash. After all, stock options are a form of compensation, and compensation is plainly and simply a business expense, right?

Well, it can be. The Standards Board is considering changing accounting regulations because board members fear that highly paid execs abuse nebulous stock-options rules for their own benefit. (The board has allies ranging from billionaire Warren Buffet to Alan Greenspan.) If the value of exercised options is many times the value of the options when they were issued, the remaining stock becomes devalued. Eliminating the devaluation means removing the funny-money aspect of options. The board believes making options more "honest" will only happen when execs are forced to treat options like tangible, here-and-now cash.

The flaws in this analysis are many, but local liberal Democrats Anna Eshoo and Zoe Lofgren have pointed out the primary one. Many rank-and-file employees, not just corporate execs, benefit from stock options. According to Lofgren, 53 percent of companies that offer stock options offer them to all employees. Within the technology industry, 88 percent offer options to all employees.

Stock options are obviously more important in startups, where money for salaries is tight. A report by investment bank Bear Stearns estimated that the Standard Board's proposal would slash tech industry profits by 60 percent on average.

Another flaw is the whole notion of valuing options in cash terms. Let's say I give you $100 for a gambling trip to Vegas. You could return broke, rich or somewhere in between. The Standards Board would have you pluck a profit number out of thin air, add that to your travel expenses and expect you to factor that into your decision to gamble in Vegas. As anyone who got rich on options knows, or watched them sink in value to the point they would cost you money to exercise them, option profits are about as predictable as a slot machine payout. Maybe even less so.

As of this writing, the House recently passed Anna Eshoo-sponsored legislation proposing that companies expense the stock options of their top five executives but not the remaining employees. Barbara Boxer is expected to handle the issue in the Senate.

Passage in the Senate requires first outmaneuvering a member of the "Party of Business," a certain champion of the free market and chair of the Senate Banking Committee, one Richard Shelby.

Sen. Shelby, of Alabama, promises to stop any legislative attempt to challenge the Standard Board's rule changes. On Tuesday, Shelby caucused with valley CEOs at the members-only Silicon Valley Capital Club and agreed that valuing the options remains an unresolved dilemma.

However, a quick look at the press releases on Shelby's website confirms he's not worried one bit about the people or companies benefiting from traditional stock option practices. The saying "all politics is local" practically screams from the press release titles. Seven brag about bringing home military pork spending. Two boast of protectionist legislation for local shrimp farmers sponsored by the so-called conservative. And, of course, one proudly proclaims his ire for the kind of judicial activism invented a half century ago to drag places like Alabama kicking and screaming into the 20th century.

The irony of liberal Democrats trying to help business by working to circumvent a conservative Republican is rich indeed. Perhaps when the Democrats find a way to get their venture capital buddies to invest in the shrimp industry, our nation can move past this wrenching debate.

In the meantime, you single tech dudes out there looking for love without the promise of stock options: Two words ... Gold's Gym.


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From the July 28-August 3, 2004 issue of Metro, Silicon Valley's Weekly Newspaper.

Copyright © Metro Publishing Inc. Metroactive is affiliated with the Boulevards Network.

For more information about the San Jose/Silicon Valley area, visit sanjose.com.




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