High-tech lifeblood at risk

Here, in the windowless office of Michael Sears's start-up, is Silicon Valley in miniature.

On the table, a computer runs a program that Mr. Sears thinks will be the next big thing. Employees flit in and out on their own schedules, sometimes arriving at lunchtime, sometimes staying past midnight – and each of them has stock options.

It's a scenario that's been repeated countless times here in Silicon Valley: A company gives its employees the ultimate incentive – stock options – to turn a bright new idea into business success. Even in this most bearish of markets they remain a central capitalist tool, bringing the best workers to the best ideas and keeping them motivated.

Yet Sears leaves no doubt: If he has to start counting his employees' stock options as company expenses, fewer people will get them and things will change: "Those guys will be here at 8 a.m.!"

As momentum builds to tally stock options as expenses on financial reports, this bare-walled room buried in an office park offers a unique perspective on how the practice could change the cradle of American innovation.

For 20 years, the promise of stock options has fueled innovation in Silicon Valley, encouraging everyone from secretaries to CEOs to work into the wee hours for start-ups conceived on placemats and offering barely enough salary to pay rent.

Some say that even with fewer stock options, the valley's ever-ingenious start-ups would find a new way to reward workers. To many here, though, any such move would chip away at the planet's most successful capitalist experiment, dampening a culture of risk and reward with dubious reforms.

"They're talking about killing the golden goose," says Bruce Maxwell, a consultant and venture capitalist here.

It's an argument tech-industry lobbyists have used – so far successfully – to ward off attempts to mandate the expensing of stock options. One study showed that would cause a 70 percent drop in tech companies' earnings.

But pressure for change is mounting. Federal Reserve Chairman Alan Greenspan recently saidstock options are a factor in the corporate crisis, encouraging executives to lie in order to drive stock prices higher. The national accounting standards board has expressed interest in making businesses expense stock options, and Coca-Cola recently decided to do it voluntarily. At least one major high-tech company, EMC, has followed suit.

The trend "is on the side of something happening," says Carol Bowie of the Investor Responsibility Research Center in Washington. "There is a groundswell of feelings that options are a part of the problem."

But from this side of the Sierra Nevadas, it seems that expensing might only make matters worse.

Options rely on rising stock prices – now hard to find on Wall Street. They give holders the right to buy shares in the future, at a specified price. If a stock's market price rises in the meantime, this can mean a big discount.

Page: 1 | 2