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Tech start-ups get back to basics- Changes in stock-option accounting-board scrutiny-and scrutiny of business practices

SAN FRANCISCO — High-tech start-ups are tiptoeing through a
financial minefield to avoid a repeat of the Enron fiasco.

By Jon Swartz, USA TODAY

Executives, investors and academics are rethinking basic concepts
on such issues as reporting financial results and composing a board
of directors.

"It’s a conservative age, a time for back-to-basics business," says
John Girard, CEO of e-publisher Clickability. "Enron has leveled the
playing field. Companies are now rewarded based on real results —
not hype."

Tech upstarts face new challenges in addition to the headaches of
raising venture capital and developing products, including:

Potential changes to stock-option accounting. Legislation penned by Sens.
Carl Levin, D-Mich., and John McCain, R-Ariz., would end tax write-offs given to
companies whose employees exercise stock options.

Stock options are heavily used in the tech industry to compensate
employees — and are especially important to start-ups who often
lack the revenue to pay employees as much as bigger firms can.

If passed, the law would "heavily damage the ability of start-ups to
recruit and retain top management," says Patricia Thornton, a
management professor at Duke University.

More attention to the books. Only 3% of high-tech CEOs have finance
backgrounds compared with 30% of CEOs at Fortune 500 firms, says David
Kixmiller of executive recruiting firm Heidrick & Struggles.

So, the engineer-educated tech management is going to have to
pay more attention to unfamiliar subjects. "They need to closely
watch revenue recognition," Kixmiller says.

Software companies, in particular, face more scrutiny because of
how they recognize quarterly revenue from long-term contracts. Most
divide the contract’s value equally over its duration, but some still
count all of the revenue upfront in one quarter.

More board scrutiny. The boards of start-ups tend to be dominated by people
with an interest in the company: founders, friends and investors. Start-ups
typically cannot pay enough to attract top outside talent. In addition, the
prospect of lawsuits and subpoenas over corporate shenanigans could scare
away potential veteran candidates.

"If board members are held liable for whatever happens at
companies, no one will join," says eLoan CEO Chris Larsen.

"Enron puts the onus on board members to be involved in their
companies and to be accountable," says Erik Lassila, managing
director of venture firm Clearstone Venture Partners.

Tighter scrutiny of business practices. Tech start-ups are being more
cautious in hyping their products, prospects and strategic relationships to
investors, say software and Internet executives.

"Everyone is taking the extra step to be aboveboard and not arouse
suspicion," says James Segil, president of consulting company
Knowledge Base Solutions. "The business climate is too
conservative these days."

http://www.usatoday.com/life/cyber/tech/2002/03/12/back-to-basics.htm

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