Nothing lures top talent like the chance to get really rich. Watch out, Microsoft.
A cabal of very strange bedfellows - federal regulators, union organizers, cynical politicians, and Microsoft - have teamed up to crush the dream of economic freedom for every working stiff in America. In the process, they may be unwittingly kicking off the next great entrepreneurial boom.
I'm talking about stock options. You remember those. Way back in the last century, options were the ticket to personal liberation; the one chance, besides organized crime and Lotto, for an everyday person to get rich. In those balmy days, options - which give the holder the right to buy or sell a company's stock at a specific price, by a specific date - were celebrated as the great egalitarian tool, spreading wealth according to hard work and merit.
They were also recognized as the fuel of entrepreneurial fire, driving the creation of new technologies, new products, and new companies. The US tech sector had perfected the use of options as a recruiting device and employee incentive, and in doing so became the fastest-growing, most innovative economic force in history.
Lately, though, options have become the bête noire of 21st-century corporate life. The Financial Accounting Standards Board, which sets accounting guidelines for public companies, is preparing to force US corporations to report stock options through "fair value" expensing.
Now, in what pundits are calling the final nail in the coffin, Microsoft is discontinuing its options program. No wonder it seems like the end of an era. Bill Gates may be the Prince of Darkness, but he's also a genius. If he says options are dead, who's to argue? Entrepreneurs, for starters. They want the same powerful tool at their disposal that Gates used to attract top-flight talent to a budding Microsoft. But if they're smart, they'll keep their mouths shut.
Ever since the modern tech world was born, with the explosion of Fairchild Semiconductor in the late '60s, established corporations have struggled to find ways to compete with faster-moving startups.
They gave us flex time, telecommuting, onsite day care, gyms, and subsidized cafeterias - all the lures that can be employed by big-budget corporations with economies of scale. But none of those perquisites have ever proven to be as powerful a motivator as the chance to get rich. Really rich.
It was options - or the lack thereof - that blew up Fairchild and created AMD, Intel, and the rest of the semiconductor industry. And after that day in 1980 when Apple went public - transforming the parking lot overnight from Bugs and Volvos to Porsches and BMWs (some driven by secretaries) - there was no going back. Options were the name of the game; startups had them, and every established company interested in retaining its employees followed suit.
Bill Hewlett and Dave Packard understood this first. The Hewlett-Packard option plan became the model for thousands of maturing tech companies. Options packages didn't keep these firms from hemorrhaging talent during the dotcom boom - nothing would have stopped that gold rush - but for the most part, they've stanched the bleeding.
Now the Feds are reopening old wounds. The FASB is pushing options expensing in the name of responsible accounting, but the net effect will be a flood of top talent abandoning established companies for startups.
Tech startups are the dynamos of our society. They create new wealth, jobs, and inventions - and sustain our competitiveness on the world stage. Best of all, they shower wealth on the most unlikely people. Startups are the engines of human liberation. They're also scary. They upset the established order. They're risky. And they attract obsessive, difficult, headstrong people fixated on changing the world.
What's Microsoft doing mixed up in this debate - aligned with self-righteous union organizers and button-down accountants? Easy: It's getting old. Redmond's days of minting employee millionaires are over. Gates would love for the business world to follow his lead and settle into a mature, responsible existence. No more keeping up with the kids. It's a comfortable corporate rocking chair from here on out: more gyms, more microwave popcorn, and, at Christmas, a fistful of restricted stock certificates.
If this happens, Microsoft wins. Without options, competitors are at a disadvantage in recruiting top employees. How many other organizations can draw from a $49 billion war chest to buy all of the big talent and little companies it needs to stay competitive?
But a move away from options won't protect Microsoft from private startups. Kleiner Perkins general partner Vinod Khosla supports the FASB plan because he sees what's about to be unleashed. His own pre-IPO investees won't be affected, and he'll clean up. Before long, millions of tech workers will realize that they're stuck in a career they never wanted: a dead-end job, a steady paycheck, and a gold watch at the end, with no shot at the brass ring. Then they'll flee for startups - or start their own.
There they will find options flowing like water, because private firms have no shareholders to report to. (By the time they go public and face abandoning options, the early employees will have gotten their reward.) And while the new entrepreneurs are busy building renegade, world-changing companies, their big corporations will be getting the books in order, struggling through the intricacies of the Black-Scholes formula, rallying investor relations to communicate the impact of options expensing on earnings, and burning through millions of dollars and thousands of hours of overhead. This is why Intel CEO Craig Barrett is leading the fight against the FASB's option-expensing initiative. It spells disaster for most public tech companies.
And lest you think that entrepreneurs will never again see the money to start new companies, VC funding has bottomed out. Soon it'll be turning around. That's how cycles work. We are on the brink of tech's next golden age, when Moore's law, broadband wireless, and nanotech will converge to create the Embedded Revolution. Combine a few thousand hungry new companies, top talent to run them, and VCs eager to back them, and we'll find ourselves in a wave of change that'll dwarf even the last one.
It's hard to imagine a more perfect comeuppance to the bean counters and bureaucrats trying to rein in human imagination and the lure of economic freedom. Expensing stock options may well accelerate the technology revolution - and, with wonderful perversity, lead to the creation of even more employee stock options than ever before.
Go, FASB, go!
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