June 16, 2003
Vinod spells it out--favor the entrepreneur
If you believe as I do that innovation comes from small companies, that risk taking with breakthrough ideas should be nurtured, that investment in new entrepreneurial ventures is a good thing, that the entrepreneurial energy that has fueled America's growth and is the lifeblood of Silicon Valley is to be encouraged, then we should require expensing of stock options.
The best talent will have incentives to move to the small venture backed companies. They will be better staffed to overcome the almost herculean challenges they face from the big established, usually cash rich, players. Their odds will be better and the playing field a little more level.
The Doerr v. Khosla disagreement (see background on this issue and Doerr's take from one of my earlier posts here) proves one thing: reasonable people can disagree. Smart people on both sides predict wildly different outcomes if FASB requires expensing of stock options: Doerr thinks it will hurt the valley, Khosla thinks it will help the valley, and many valley economists think it will have a negligible effect (according to Stanford economists I’ve discussed this with) while others such as James Glassman think the effect will be catastrophic.
I’ll admit that I’m not smart enough to be able to predict what will happen, and I would guess that given the amount of disagreement there is no real way of knowing whether the intended and unintended consequences will occur as predicted and whether the result will be a net positive or net negative. So in these instances I revert to core principles: is centralization good or bad? It would be wonderful to believe that every company can be judged on an even playing field—and that uniform, rigid accounting standards are needed to enable investors to compare apples to apples. But the world doesn’t work this way, and there are apples, oranges, pears and more out there, and trying to squeeze them into one set of standards just creates mush. You simply cannot put all of the information about a company into one statistic, such as earnings, and trying to do so glorifies simplification over truth.
Khosla may in fact be right in his calculation that mandatory expensing will favor entrepreneurs. I’m all in favor of helping entrepreneurs but also have to admit that using government to afford entrepreneurs a special advantage rubs my libertarian sensibilities the wrong way. The argument can persuasively be made that these are needed counterweights to the plethora of benefits big companies enjoy, but these types of arms races—a tax credit here for their special deduction there—almost always produce more dysfunctional systems in which governments, not entrepreneurs, investors, customers, and “the market,” are in the position to pick the winners.
Also, see Andrew Anker's take on VentureBlog.