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Stock Options Accounting Change for 2005

Somehow I missed the accounting rule change about treatment for stock options. It used to be that companies didn't have to declare these as an expense. Now they do. This is a simple change, but the consequences are going to play out for a lot of companies this year.

Tech company execs aren't happy about this. Using options is a way to have minimal financial impact since the company mints new shares to compensate employees instead of using cash. Cash is preserved, the shares are diluted, but hardly anyone pays attention to that - most pay attention to the balance sheet and option costs didn't show up there.

It used to be that you could pay a salary that was lower than average, but the immense amount of work done by your employees was more than paid for with the options. Now rewarding the sacrifices made by overworked employees is going to be harder, although pre-IPO startups may feel the effects less than public companies. This is because it will affect their initial valuation but is largely irrelevant before they are public.

I have mixed feelings about the change, but it does make stock analysis easier. The huge number of option shares outstanding could adversely affect stock price. You could see huge volumes and price drops on days when restricted employee exercises were allowed, and had to pay attention to this if you were timing purchases.

Posted by Mark Wednesday, January 26, 2005 7:37:00 PM | permalink |

Comments:

I found this link at Joel on Software while I was searching for more information on the change. He's got a good explanation of options and how they affect finances if you aren't familiar with the concepts. If you are you can probably give it a pass.
For Creek Software

# posted by  Mark : 10:42 PM

 

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