 |
Feb. 16, 2005 — The National Science Foundation (NSF) estimates 40,000 scientists in the United States have the skills to work in nanotechnology. However, assuming that nanotechnology grows into a $1 trillion industry as the NSF estimates, 800,000 highly skilled nanotechnology workers will be needed in the country by 2015. The European Union and Asia also will require hundreds of thousands of specially trained nano workers.
 |
Risk management — which includes asset protection — also includes people. Recruiting and compensation issues will be a dynamic process as nations compete for scientific and engineering nanotech talent. Attracting critical talent will be an essential element of an emerging nano company’s business plan. Keeping that talent will also be critical for a company’s success. Both recruitment and retention will require creative approaches, particularly given a recent mandate that could affect stock options.
 |
U.S.-based technology startups are usually short on cash and revenues. Traditionally, they have attracted key talent with the lure of stock options, since cash compensation programs run counter to the mission of raising funds for research and product development. The model for stock compensation has always been very broad-based and egalitarian at technology companies. This philosophy evolved from the collaborative environment that the technology sector grew out of in university laboratories.
 |
Changes in the road ahead
That is expected to change this year. The Financial Accounting Standards Board (FASB) has mandated recognition of financial statement expenses for stock-based compensation. FASB is the rulemaking authority for accounting empowered by the Securities and Exchange Commission.
That means the fair value of stock options will have to be expensed beginning the third quarter of 2005. The issue for employees is that companies may stop granting stock options as this new expense will have to appear on income statements and will therefore impact earnings.
This is a change from the previously announced date of Dec. 15, 2004. FASB wanted to give companies more time to adjust to the accounting rules and address the issue of determining “fair value.” There are a number of companies that are selling financial models that will help determine fair value.
So far, the effect of the new regulations has not been that significant in the technology industry. But for some companies, employee stock option programs will compose the largest expense item. That has prompted some to consider discontinuing the programs. Public technology companies have begun to study alternatives to stock options in a post-expensing world, like discounted options or stock appreciation rights and performance shares.
Some companies that see opportunities for growth on the horizon have decided that they will stick with stock options, since they remain the most effective device for attracting and retaining talent. This is especially true of pre-IPO nanotechnology firms.
Managing the new reality
The challenge for nanotechnology companies when they go public and once they become public will be to keep their investors informed of their compensation philosophy. Shareholders have become increasingly critical of potential dilution from stock options in technology firms, especially where the equity is concentrated at the top.
Companies assessing their potential risks also should consider their dependence on their star researchers and innovators. Many nano companies are built around key scientific and technical talent who develop the primary intellectual property assets of the company — patents. The sudden death or departure of a key individual could have a significant impact on the financial prospects of a young company. Traditional planning tools like key person insurance or supplemental retention/benefit agreements may be a solution that should be considered to protect the company’s investment in its talent.
In addition, it can take years to develop nano concepts into commercially viable technologies. While equity/stock has the allure of a long-term financial “home run,” it also is important to balance this potential with a package of retirement and insurance benefits that provide basic protections in the meantime.
Attracting critical talent and keeping it will be an essential element of an emerging nano company’s business plan. Greater attention and a creative approach to compensation issues will be more important than ever before.