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Entrepreneurship at Risk in Silicon Valley …

by Sachin Balagopalan on December 22, 2008 · 1 comment

Some of the biggest tech companies like Intel, Apple, Google, eBay, Cisco and Microsoft all have something in common. They were all startups once upon a time long before becoming the behemoth companies they are today. Most of these companies were started based on an idea, which most likely led to several rounds of financing from VC’s and eventually making an IPO . This “startup-venture capital-IPO” model has been the fundamental formula for creating new and in some cases great companies, monetizing innovation and generating new wealth in Silicon Valley - and elsewhere - for the past several decades. This process not only creates new companies and generates enormous amounts of wealth for the founders but also contributes to the overall growth in the U.S. economy. Millions of jobs are created, products are produced and sold globally and investors are given the opportunity to participate in the success of these companies.

The Wall Street Journal is reporting that this “formula for success” is now being threatened by none other than Uncle Sam …

WSJ: It has been a system of amazing efficiency, its biggest past weakness being that it sometimes (as in the dot-com “bubble”) creates too many companies of dubious viability. Now, this very efficiency may be proving to be its downfall.

From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Remember stock options? One of the main reasons for success was the startups were able to attract top talent to work for them and they did this by granting incentive stock options. The options in most cases were worth nothing at the time of the grant but in the event of an IPO they could exercise those options and in many cases become wealthy beyond their imagination. However in the wake of the dot.com bubble burst and the accounting scandals at the beginning of the decade prompted congress to pass the Sarbanes-Oaxley act. One of the provisions in the act was options-expensing where all stock options have to be reported as an expense to the company at the time of the grant as opposed to when they are exercised, typically based on a vesting schedule that is staggered over a number of years.

Hard work and risk need to be rewarded IMO but legislators have to walk the fine line between impeding wealth creation and protecting the public from outright fraud as in the case of Enron and some of the other companies involved in the accounting fraud cases.


{ 1 comment… read it below or add one }

make a collage online 03.01.11 at 2:10 pm

Thank you friend for the information

The article is very professionally written. I enjoy reading every day

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