NVCA’s Heesen Warns: Don’t Mess With Stock Options

Mark Heesen, president of the National Venture Capital Association, told a Senate Finance Committee last week, that proposed changes to corporate accounting and tax rules for employee stock options could undermine venture capital.

Heesen urged the Committee, chaired by Senators Max Baucus (D MT) and Charles Grassley (R IA), to consider the harmful implications of S. 1940 proposed by Senators Carl Levin (D MI) and John McCain (R-AZ) on entrepreneurship and economic growth in the United States.

The Levin-McCain bill proposes changes to the tax code that would require the expensing of employee stock options to receive a corresponding deduction.

In a message that supported greater transparency in financial statements, Heesen noted that new corporate governance safeguards and shareholder approval of stock option plans are appropriate means to restore market confidence. “What is good about stock options can be preserved and made better through better disclosure, better corporate governance and greater accountability to shareholders,” Heesen says.

However, Heesen adds that the current tax treatment of stock options is consistent with sound policy and common sense and characterized the Levin-McCain approach as bad tax and economic policy. The impact of a change in either accounting or tax treatment that would make stock options more “expensive” will have an adverse impact on the entrepreneurial economy.

“In addressing purported Enron concerns, we must be cautious toward measures that will not prevent future Enrons’ and will, in fact, cause harm,” Heesen says. “S. 1940 would force companies into Hobson’s choice take an inaccurate fair value’ expense charge for stock options when options are granted, or forgo any tax deduction when the grantee exercises the options. The likely result in most cases is the death of broad-based stock options plans.”

Heesen told the Committee that stock options are not only an incentive for high ranking executives but are granted to more than 10 million Americans today. “Middle-class Americans would be hit the hardest, by depriving them of the options-based gains they use to buy homes, put their kids through college and provide for retirement. Small-to-medium sized-companies, especially startups, would be hurt because of their reliance on options as a way to lure employees away from higher paying, more stable jobs,” he says.

“With entrepreneurial thinking, due in part to the current treatment of stock options, U.S.-based companies have a competitive advantage over their foreign counterparts. The current economy, especially the high tech economy, needs workers with the commitment and motivation that options provide.”

Heesen closed his testimony by expressing his commitment to working with the Committee, the SEC and other agencies in addressing the issue.