Sarbanes-Oxley Is Good For The Valley

Two weeks ago we wrote about Vinod Khosla of KP coming out in favor of requiring companies to expense stock options. He argues that expensing options hurts public companies more than private companies and thus it will give venture backed start-ups an advantage. It turns out his logic may be even more appropriate for Sarbanes-Oxley. SOX (as it has been nicknamed) is bad for American business as a whole, but it will affect bigger companies far more than start-ups. So on a relative basis, the landscape for start-ups will improve in the post-SOX world.

Sarbanes-Oxley is a direct result of Enron, Worldcom and the various accounting scandals of the 90's. TheDeal.com has a good package of information about SOX, including the text of the act itself. In essence, SOX gives corporate boards far less flexibility than they once had while simultaneously leaving executives with far fewer reasons to want to be a board member. If you are a successful executive late in your career, the benefits of lending your considerable expertise as a board member no longer outweigh the risks to your net worth.

While SOX may or may not improve corporate governance, it's hard to imagine it won't cause increased conservatism in corporate decision making. Every outside party transaction, every relationship of board members, every bit of managment compensation and on and on is under scrutiny. It is already a large enough market that we've seen start-ups targeting it. Call it the 90's Mania Hangover Act. But the unfortunate thing is that the companies that didn't party tend to be experiencing the worst headaches.

And that creates opportunity for Silicon Valley start-ups which are far less shackled by SOX. I'm being facetious in saying that Sarbanes-Oxley is good for the Valley, I think it creates more problems than it solves. But early stage companies can take solace in the fact that this one mostly passed them by.