By Paul Elias
The Associated Press
SAN FRANCISCO - The nightly routine of young paper millionaires crowding San Francisco nightclubs might be long gone, but stock options remain a vital way of life in entrepreneurial Silicon Valley.
Even as Microsoft Corp. abandons the practice, many technology startups need the allure of stock options to attract talented - and risk-taking - workers who otherwise might opt for more established companies.
"People who go to stock options are the visionaries who see the potential in the company, are excited about the future and have a little gamble in them," said Sy Richardson, chief executive of the Internet-based telephone company Five Star Telecom. The startup employs eight people, all of whom have stock options.
The options allow the employees to buy stock in their companies at pre-determined prices. That worked great in the late 1990s when stocks soared well above the pre-determined share price and employees profited from their stock options. But when the stock market crashed in 2001, options at many companies became worthless because the stock was trading below the value of the options.
That's why Microsoft said Tuesday that it would no longer give its employees stock options and instead simply give them stock, but with restrictions on when they can sell the shares.
Microsoft's announcement created a stir in the high-technology industry because, more than any other sector, it relies on stock options to power risky ventures that are often short on cash but long on promise.
For that reason, experts say news of the stock option's demise may be greatly exaggerated.
"I think it is unlikely that you'll see a single technology company follow Microsoft's lead," said Rick White, president and chief executive of lobbying firm TechNet, whose members include Microsoft, Apple Computer and about 200 other technology companies. "Microsoft is more like Coca-Cola than a high-technology startup."
White said some tweaking is needed on how high-tech companies dole out stock options to executives while ensuring the rank-and-file continue to receive theirs. He said established money-making companies such as Microsoft don't need to award stock options to sustain their growth. But unprofitable startups do.
The public perception of stock options has become increasingly negative because of high-profile cases of senior managers cashing in their holdings for millions of dollars even as the companies they run are struggling.
According to the National Center for Employee Ownership in Oakland, about 2 percent of the work force at publicly traded companies held stock options in 1992. Today, about 15 percent of the work force does, the same level as three years ago.
"If you want to convince a software engineer or even a receptionist to not take a job at Microsoft and instead join your startup, you've got to give them something to make it worth them taking that risk," said Corey Rosen, the center's executive director.
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