August 24, 2005 11:09 AM PDT

VC predicts eventual rebirth of stock options

ASPEN, Colo.--Technology companies may escape the most harmful effects of accounting changes that force the expensing of stock options, one of Silicon Valley's most prominent venture capitalists predicted on Tuesday.

Tom Perkins, a legendary venture capitalist and partner at Kleiner Perkins Caufield & Byers, said at a dinner gathering here: "We'll have to find some way around it. There probably is a way...I suspect something will come up."

In December, the Financial Accounting Standards Board released its final regulations on expensing, which required companies to subtract the cost of stock options from their earnings. That disproportionately affects technology companies by cutting reported earnings and reducing the company's incentive to offer options to employees.

As an example, Perkins told the audience at the Progress & Freedom Foundation's annual dinner that he invented junior common stock to retain employees after Genentech went public. (Kleiner Perkins paid $100,000 for a 33 percent stake in Genentech, a company with a market capitalization of $95.5 billion today.)

"I came up with the idea of a new kind of stock--it would convert to common stock when certain benchmarks" such as earnings or profitability were reached, he said. But because the value was not guaranteed, it could be priced at one-tenth the cost of a share of traditional common stock.

"That was an example of financial engineering," Perkins said. "Someone will come up with something again." Not being able to grant stock options doesn't hurt start-up companies much--their founders continue to get cheap stock--but it does affect companies that are publicly traded, he said.

Tech companies already are experimenting. Google is awarding restricted stock that takes four years to vest but will hold value if the stock price drops. And Sun Microsystems, Advanced Micro Devices and others have effectively sidestepped the expense requirement by accelerating the rate at which stock options become eligible for use by employees.

Perkins also took a swipe at the controversial auditing requirements of the Sarbanes-Oxley Act, saying they represent "a real burden on a small company that's going public. The accounting expenses engendered by Sarbanes-Oxley are...just tremendous."

 

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