September 24, 2007
Chicken Little
Posted by Victor Fleischer

Here's an excerpt from the National Venture Capital Association, talking about compensation and economic growth.  Can you guess what [x] is? 

Without a doubt, [x] [is] an important part of a successful formula.  Venture-backed companies, steeped in the culture of shared ownership, have had an enormous impact on the American economy. ... In the current shower of negative press over the excesses of a few, it is important to keep our eye on the real economic prize and the role that [x] [has] played in maintaining economic growth.

As we can see from the troubles in many economies, here and abroad, growth in jobs and GDP cannot be taken for granted.  ... Just as [x] [has] been an essential part of the engine that has driven America's entrepreneurial leadership and economic growth over the last decade, [it] can be a key to a brighter future for many more.  ...

But the U.S. does not have a monopoly on [x].  We see an example of the need to be prudent in the technology area, which has serious competitors outside the U.S.  Taiwan, for example, has built great technology companies on the foundation of [x].  ... These strong Taiwanese companies have been built with American engineers and managers who joined them in part because of more favorable [x] treatment in Taiwan.  The Peoples Republic of China is also beginning to build a technology industry with the help of [x].  Several European nations are revising their accounting rules to encourage the use of [x].  The world has taken notice of our economic success and has discovered the importance of [x] as a competitive tool.

So .. can you guess what [x] is?  Hint:  It's not carried interest.

It's stock options.  The NVCA lobbied heavily against the proposal to record stock options as an expense on the income statement, arguing that the accounting change would substantially harm the technology industry.  The accounting change was eventually made a couple of years ago, and yet the sky has not fallen, and Silicon Valley has not moved to Taiwan. 

The same goes for carried interest.  Changing the tax treatment of carried interest will not cause the sky to fall, I promise. 

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