Back in 2004, the Financial Accounting Standards Board (FASB) issued a ruling requiring companies to expense the “value” of stock options granted to employees. What does this mean? Essentially, companies are now required to estimate a non-cash expense on their income statement for employee stock options instead of just accounting for them as equity. I actually filed a short paper with the FASB against their planned expensing, but they clearly ignored me! Many people feared that expensing stock options could kill the goose that lays golden eggs in Silicon Valley and other areas with high growth companies, since expensing would discourage issuing options and make it harder to hire top employees at higher risk companies.
So what has happened since 2004? I wasn’t able to find any studies on the impact this ruling has had on stock option grants. My own non-scientific analysis based on discussions with Silicon Valley companies leads me to conclude that this rule change has significantly decreased stock option issuance to rank-and-file employees. Companies that used to be very generous with options at all levels have cut back not only the amount of stock granted but also eliminated grants to lower level employees. Earlier stage startups don’t seem to be hit quite as hard, but the overall culture has shifted to reducing stock options for employees.
The impact of this cultural change is an increased difficulty in hiring top talent at high growth companies and startups who have limited cash and benefits to offer. In a competitive job market, this puts growing, innovative companies at a disadvantage. Talented engineers weigh the risks and rewards of companies when making career decisions. If higher risk companies can no longer offer high rewards, what impact does this have on the ability of these companies to compete for talent and grow to the next level? I’d be curious if anyone has observed similar happenings with reduced stock option grants in the market.
Interesting food for thought. I work for a public technology company, and they stopped giving options to non-managers in 2005. I had assumed it was because the executives were greedy, but I’m sure this must have been a factor in their decision. So much for helping out the little guy. Thanks FASB.
my company cut stock option grants in half about 2 years ago. our stick is in the tank right now, so not that it really matter much.
Best you should make changes to the page name Did Stock Option Expensing Kill Growth Companies? Venture Recruiter to more specific for your webpage you make. I liked the blog post withal.