Risk-Reward Models; America's System Works Best

The Washington Times (Washington, DC), June 22, 2004 | Go to article overview

Risk-Reward Models; America's System Works Best


Byline: Robert Pavey, SPECIAL TO THE WASHINGTON TIMES

In the aftermath of corporate scandals, Congress currently is debating what to do about stock options. There is a lot at stake since the Financial Accounting Standards Board in March mandated the expensing of employee stock options. It was a sharp blow to our economy's risk-takers, who historically have been at the forefront of U.S. job creation and innovation. The board's proposal threatens to obliterate the one financial incentive that young venture-backed companies rely on to grow.

While employee stock-option programs have become more mainstream within large, publicly traded corporations in recent years, it is the venture capital and start-up communities that have relied upon stock-option incentives for decades to create tremendous value out of new ideas and driven individuals.

America has differentiated itself economically through its venture capital, entrepreneurial and employee stock-option systems. No other economy in the world has been able to duplicate the successful risk-reward models that we have built in the United States. Our risk capital system works because it rewards all stakeholders - not just investors. Founders and employees work long hours on groundbreaking efforts in the hope that there will be a just reward for success.

Venture capitalists often insist that employee stock options be granted to all employees because no other financial tool creates commonality of interest between workers and investors. It is our ability to create this commonality that makes our entrepreneurial culture possible - something that other cultures have failed to do.

The proposal by the Financial Accounting Standards Board will change this dynamic. It's extremely challenging for any business to place a value on employee stock options, but it's next to impossible to place a value on employee stock options of a private, entrepreneurial company. The company's stock is not tradable, there are often no similar companies in existence to benchmark and its future is highly uncertain. Any value derived from using existing valuation models is guaranteed to be highly inaccurate. …

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