Last week I wrote about the proposed FASB rules requiring the expensing of stock options. After giving the issue some thought, and in talking with several entrepreneurs, company executives, and other investors, I have come to the conclusion that the rules, as proposed, would deal a fatal blow to the entrepreneurial culture and startup experience in the Valley and the broader technology industry.
The proposed FASB rules would require companies to report stock options as compensation expense, relying on the Black-Scholes deriviative valuation model as the method for valuing said options. It is important to realize that this model was developed in 1973 and never anticipated stock options as the technology industry understands them, but rather financial option instruments as in put and call options. In short, it is broadly accepted that Black-Scholes is not the most appropriate method of valuing employee stock options, but "it's the best thing we have right now". In my view, this is not an acceptable rationale and should the SEC and FASB require companies to report employee stock options as compensation expense, then they should figure out the best way to value them. See "Black-Scholes: A Failed Model for Executive Options".
Representative Anna Eshoo has sponsored HR #3574 which would, if passed and signed into law, require companies to report the stock options grants to the top level executives as compensation expense. Not only will this measure serve to bolster the move to accurately report executive compensation, it will also serve to reign in egregiously disproportionate executive compensation that is itself the flash point of compensation critics.
Despite the broad bipartisan support for HR 3574, the measure will ultimately have to go through the Senate Banking Committee chaired by Senator Richard Shelby (R-AL), who has publicly said he would block any effort to overturn the FASB proposal. It is essential that the technology community come out in force on this issue, please contact your local member of Congress and Senators to urge them to support HR 3574 to ensure that a key cornerstone of the single most important growth engine in the U.S. economy stays intact.
The full text of H.R. 3574
http://frwebgate.access.gpo.gov/cgi-bin/useftp.cgi?IPaddress=162.140.64.21&filename=h3574ih.pdf&directory=/diskb/wais/data/108_cong_bills
Find your local Member of Congress and write to them:
http://www.house.gov/writerep/
Write your state Senators:
http://www.senate.gov/general/contact_information/senators_cfm.cfm
A great site with lot's of information and background on this issue:http://www.savestockoptions.org/
News stories on the FASB rule proposal:
http://www.twincities.com/mld/pioneerpress/8324441.htm
http://www.masshightech.com/displayarticledetail.asp?Art_ID=65245
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