honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser

Posted on: Sunday, July 20, 2003

Stock options help startups attract new talent

By Paul Elias
Associated Press

Stock option

Definition: The right to buy a specific number of shares within a particular time period at a certain price. Used as an employee incentive.
SAN FRANCISCO — The nightly routine of young paper millionaires crowding San Francisco nightclubs may be long gone, but stock options remain a vital way of life in entrepreneurial Silicon Valley.

Even as Microsoft Corp. abandons the practice, many technology startups need the allure of stock options to attract talented — and risk-taking — workers who otherwise might opt for more established companies.

"People who go to stock options are the visionaries who see the potential in the company, are excited about the future and have a little gamble in them," said Sy Richardson, chief executive of the Internet-based telephone company Five Star Telecom. The startup employs eight people, all of whom have stock options.

Companies award stock options to employees in many ways, but all plans have the same basic goal: woo and retain talented employees.

The options allow the employees to buy stock in their companies at pre-determined prices. That worked great in the late 1990s when stocks soared well above the pre-determined share price and employees profited from their stock options. But when the stock market plummeted in 2001, options at many companies became worthless because the stock was trading below the value of the options.

That's why Microsoft said recently it would no longer give its employees stock options and instead simply give them stock, but with restrictions on when they can sell the shares.

Microsoft's announcement created a stir in the high technology industry because, more than any other sector, it relies on stock options to power risky ventures that are often short on cash but long on promise.

For that reason, experts say news of the stock option's demise may be greatly exaggerated.

"I think it is unlikely that you'll see a single technology company follow Microsoft's lead," said Rick White, president and chief executive of lobbying firm TechNet, whose members include Microsoft, Apple Computer and about 200 other technology companies. "Microsoft is more like Coca-Cola than a high-technology startup."

White said some tweaking is needed on how high-tech companies dole out stock options to executives while ensuring the rank-and-file continue to receive theirs. He said established money-making companies such as Microsoft don't need to award stock options to sustain their growth. But unprofitable startups do.

The public perception of stock options has become increasingly negative because of high-profile cases of senior managers cashing in their holdings for millions of dollars even as the companies they run are struggling.

Critics, including Federal Reserve Chairman Alan Greenspan, blamed executives' stock options as contributing to the mismanagement of companies.

"Companies in Silicon Valley are under fire, but they know it's critically important to give the rank and file stock options," White said. "They need to rein in senior management."

According to the National Center for Employee Ownership about 2 percent of the work force at publicly traded companies held stock options in 1992. Today, about 15 percent of the work force does, the same level as three years ago.

"If you want to convince a software engineer or even a receptionist to not take a job at Microsoft and instead join your startup, you've got to give them something to make it worth them taking that risk," said Corey Rosen, the center's executive director.

Still, stock options aren't as popular as they were during the late 1990s, and new workers are demanding higher salaries while managers alter how they give employees ownership in companies.

In the high-turnover information technology sector, workers are receiving more cash and less stock, according to a survey conducted by People3, which is owned by the research firm Gartner.

Only 39 percent of the 159 IT companies responding to the survey in March said they gave long-term incentives such as stock options to workers in 2003. That compares to 62 percent in 2002.

"They have less of an appeal than they did prior to the dot-com crash," Richardson said. "But as a founder of a startup communications company, it's an obvious choice for me to offer an actual vested interest in the company."