To Expense Or Not To Expense

We're a day behind on this story, but Vinod Khosla of KP broke ranks with the rest of the Valley (and in particular, his partner John Doerr) and came out in favor of expensing stock options. Although Doerr has been the most vocal opponent on this issue, Amazon -- a company he originally backed and where he still has a board seat -- was one of the first tech companies to expense options. So as with everything, the issue is more complex.

Or maybe more simple. Earlier in my career I spent a number of years in investment banking and did a lot of analysis of public company income statements. What you find is that each company has certain ways of doing things and over time, all companies in a given industry tend to converge on a comparable set of methodologies. Wall Street tends to enforce and reward this convergence and companies which are known to take aggressive accounting positions are punished with a value discount relative to their peers.

In the broadest terms, public market investing is about imperfect information flows: if you know something that everyone else doesn't, you have an advantage you can trade on (assuming it's not inside information). Over time, that advantage is arbitraged out. The net result is that the public markets have an intelligent process for understanding any company or industry and it's a much more complex process than simply looking at net income or P/E ratio (where the effect of expensing stock options would be most apparent).

All of which is to say, this is a non-issue. Growth companies will be rewarded for their growth, not because they do or don't expense options. The market will understand and price a stock in spite of how it accounts for options, not because. And mainstream companies are increasingly expensing, so it's hard to imagine the Valley won't have to follow close behind.