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