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When beginning a brand new startup or building a small company, entrepreneurs need to fully understand the challenges of attracting, and more importantly, keeping good employees. Providing the economic incentive for all employees to share in the wealth-building process has been the cornerstone for many successful companies during the last fifteen years in American business. Understanding what new ideas are being discussed and implemented by the Fortune 1000 companies becomes critical for all executives to be aware of, regardless of the size of their organization and how long the company has been in business.
The business game is rapidly changing, and leaders of both big and small companies need to fully understand what is changing and the potential impact these changes could have on their businesses. And more importantly, how they successfully implement these changes in their organizations. As the high-tech industry matures, executives face new pressures about how they treat certain business expenses, with stock options high on the list these days!
As smaller companies face complex decisions regarding stock participation for their employees, perhaps good lessons can be learned from watching what changes the Big Guys are making. As a case in point, Microsoft Corporation recently announced plans to stop granting stock options and instead offer current and new employees direct stock grants.
Expensing stock options and grants as a cost of doing business means less profits, and in the short term this could cause some concern on Wall Street. It will probably force large high technology companies like Cisco Systems and Intel and others to change their policy toward stock participation. Warren Buffett has said for years they should expense stock options because it is a cost of doing business.
The real problem comes from small companies not yet publicly traded who dont know the impact this will have on their business models to recruit new talent or the impact it will have on potential profits. Perhaps the way to handle this situation is to make special tax allowances for startup companies that have not gone public.
Given the current climate regarding the overall business conduct of companies, the Financial Accounting Standards Board (FASB) is now ready to make it mandatory for stock options/grants to be an expense item on the balance sheet. They have already indicated that startups are in a different cash flow situation than larger publicly traded companies and some sort of special tax consideration would be appropriate.
However, for smaller companies and startups its not quite that black and white. They need to consider some combination of an equity diversification program, whereby they offer employees ESOPs, stock grants, direct stock purchases, etc.
Be sure you have studied all the options for your company and get good advice from your attorneys and tax advisors before settling on a business approach for this critical subject. Making snap decisions could have major legal and financial ramifications for the future of your company!
William Dollar is a Senior Contributing Editor for the Wisconsin Technology Network, and has his own consulting company at www.billdollar.com
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