In three short months, private companies that report on a calendar year basis will be required to expense the value of their outstanding stock options. While many observers fear the new rules will have a chilling effect on the time-honored practice, a new study from Deloitte suggests that entrepreneurs are taking the deadline in stride.
Start-ups have long relied on options in lieu of beefy salaries to lure top employees. The new expensing rules promise to make fledgling firms less profitable on paper, while also running up their accounting bills. Yet Deloitte found that private companies are still doling out options aggressively. In fact, only among public companies are options policies being noticeably curtailed.
Deloitte's survey, which was conducted in 2003 and again this year, asked executives at both private and public companies if they were limiting the use of options. The number of private companies that planned to restrict their use of options stayed the same (about half). But the number of public companies that planned to cut back on options rose by 10 percentage points, to 83%.
The disparity could provide private firms with a recruiting advantage. "Options continue to be the big lure of working for a start-up, especially in tech companies," says Ellie Kehmeier, a director with Deloitte Tax in San Jose, Calif., and coordinator of the study. Firms that are accelerating their vesting schedule to mitigate their liability may be making a mistake. "By doing that," Kehmeier says, "they risk taking away the golden apple."
RiskMetrics, a privately held risk management company in New York City, still offers options to all hires, says director of finance Beth Gaspich. She's not concerned that the expensing will hurt her P&L or the company's valuation since "investors care more about cash flow than the future expense of our employee's equity stake." Still, she admits, after the new rules go into effect, RiskMetrics will probably consider alternatives, such as restricted stock.