The venture capital industry reacted with mixed feelings to Intel CEO Craig Barrett’s apparent attempt to reach a compromise with legislators over the heated stock options debate.
“I think what we could do as a way to prevent abuse of options and excessive option grants to the top members of a company is just basically to force companies to expense the options granted to the top five officers,”
Barrett said in response to a question at Intel’s annual meeting last Wednesday, according to Reuters.
The CEO went on to say: “That would in fact minimize abuse at the top but it would continue to allow companies to have a wide distribution of options to all of their employees without any expense. So, if you’d like to write your congresspeople with that proposal, I’d appreciate it.”
The National Venture Capital Association, for one, would not appreciate it. At its annual meeting on May 1 and 2, the NVCA encouraged its members to voice their disapproval of proposed legislation by Sens. Carl Levin (D-Mich.) and John McCain (R-Ariz.) to force corporations to account for the cost of options on their income statements. The legislation gained momentum from tales of Enron’s loose corporate governance practices.
Asked for a response to Barrett’s statement, Paul Brownell, vice president for public policy for the NVCA, said: “It certainly doesn’t reflect our opinion.” He’s been wearing out his loafers rushing between congressional offices seeking to snuff out the legislation.
There was a mixed reaction to Barrett’s comments by venture capitalists contacted in Silicon Valley.
“Options are a big part of why entrepreneurs start companies,” says Sean Foote, a partner at seed-stage investor Labrador Ventures. “Entrepreneurs work 100 hour weeks for years and they’re not doing it that so they can draw a salary.”
Adds Bill Elmore, general partner of Foundation Capital: “The whole stock option system is what allows us to create jobs and fuels the technology industry, which is on the order of 20% of GNP right now. The risk of expensing stock options for entrepreneurs, executives and technical people is that they won’t be incented to innovate anymore.”
Still, Elmore says he can appreciate that Barrett is attempting to make sure that all stock options aren’t expensed across the board. “Craig’s idea is very creative because the danger of some of the expensing proposals is throwing the baby out with the bath water the baby being stock options,” he says.
At least one VC says he’s not convinced of the industry’s sky-is-falling attitude toward accounting for stock options in income statements. “At the end of the day, I feel like if regulators want to say those things are compensation, investors will look through it,” says Sanjay Subhedar, a general partner at Storm Ventures. “People are already looking beyond earnings anyway; they’re looking at cash flows.”
He adds that Barrett’s proposal might be the way to go, since Congress is most concerned about top executives within corporations. “The abuse of that [stock options] is among the top four or five people,” Subhedar says. “He’s trying to raise a white flag of surrender to the lawmakers.”
Contacted a day after Barrett’s remarks, an Intel spokesman said: “Our fundamental position hasn’t changed, and neither has Craig’s. We currently believe that the current FASB [Financial Accounting Standards Board] method for accounting for options in the footnote is the best way.”
The spokesman says that Barrett was pointing out that the legislation attempts to solve improprieties at the executive level but in turn hurts everybody. He says that Barrett followed his comments with a caveat that did not appear in print: That no clear method for assigning an income statement valuation to options has been established.
Brownell of the NVCA says: “Current valuation models are far from perfect. If you’re trying to value options at the point of grant you’re coming up with a very arbitrary number.”
Contact Lawrence Aragon at: Lawrence.Aragon@tfn.comAdditional reporting by Charles Fellers