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060721: Options, Options, Who's Got the Options?
Ed’s Threads 060721
Musings by Ed Korczynski on 21 July 2006

Options, Options, Who’s Got the Options?
Unless you’ve been in a media blackout or too busy getting real work done to ever read a newspaper, you can’t help but hear about the “Stock Options Backdating Scandal” (>200,000 Google hits in early September) tsunami now breaking upon the shores of Menlo Park. The apparent habit of many Silicon Valley companies to backdate stock options grants is now under scrutiny. If you aren’t fully up on the topic, take the time to read up on stock options, strike price, and backdating at any mainstream media source.

I’m a technologist, not a lawyer or a bean-counter, so I can’t meaningfully comment on the law in general or how specific companies may have skirted the law. But having lived and worked in Silicon Valley for most of my life, I can comment on stock options as part of the lifeblood motivation for technologists in our industry. Put simply, stock options were a way to reward employees for the ridiculously long hours they committed to grow start-ups.

Earlier this year I listened to a panel of VCs discussing the team environment of a startup, and their unanimous opinion was that anyone interested in work-life balance and less than 70 hours/week of work had no business being in a startup. The expectation in Silicon Valley has always been to “shoot the moon” with a revolutionary new technology, and success in the marketplace occurs always and only with 80+ hours/week of work. “Yeah, I’m going to need you to go ahead and come in again this weekend.”

There used to be secretaries to top executives at start-ups who’d make millions on stock options, but those days are long gone.

The silicon IC manufacturing industry, including OEMs and specialty materials suppliers, is now mature. As a company or industry matures the potential for revenue growth slows, and since stock price is typically based on forward-looking estimates by analysts, a mature industry just won’t see the rapid rises in stock prices that used to result in stock-splits. Despite all the tap-dancing done to entertain analysts, it’s likely that the vast majority of companies in our industry will not be forecasted to double or triple in value. Consequently, stock options only turn into millions of dollars when they’re given out in massive quantities to top executives.

Engineers and front-line managers may be lucky enough to get a few thousand shares…which could turn into down-payments on new cars. Directors may get a sufficient number of shares to make differences on their tax returns. Top executives now seem to keep most of the shares (as rubber-stamped by the compensation committee), which they justify as just rewards for their enlightened strategic direction, which is fine if the direction is truly outstanding. Of course, outstanding direction should lead to out-performing one’s competitors which should result in stock price increases so there’d be no need for backdating, would there?

I expect minimal disruption to our industry and its current business models…though costs for accounting and financial records inspections will probably increase. The few actual start-ups in the chip business these days can still use stock options to incent employees, and assuming real growth in value there should be no reason to consider backdating, should there?

— ed

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060721: Options, Options, Who's Got the Options?

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Ed's Threads is the weekly web-log of SST Sr. Technical Editor Ed Korczynski's musings on the topics of semiconductor manufacturing technology and business. Ed received a degree in materials science and engineering from MIT in 1984, and after process development and integration work in fabs, he held applications, marketing, and business development roles at OEMs. Ed won editorial awards from ASBPE, including interviews with Gordon Moore and Jim Morgan, and is not lacking for opinions.