Governance regulations hurting the labor market for start-ups

Posted by Marc Hodak on February 28, 2011 under Invisible trade-offs, Unintended consequences | Be the First to Comment

A story today describes how start-ups are having problems:

Internet start-ups across Silicon Valley are struggling to compete for talent amid the investment frenzy gripping Facebook Inc., Twitter Inc. and Zynga Inc., with many smaller companies beefing up pay and recruiting and wading into the private-company share market to keep pace with their larger rivals.

Silicon Valley is full of world-class engineers sleeping on futons and living on ramen noodles.  These (mostly young) people accept company paper instead of the decent cash that their talents could easily justify for the privilege of toiling 14 hours a day in untested ventures.  This system depends upon well-functioning equity markets to secure this manner of devotion.  Public equity markets enable those making the gamble to see the payoff sooner.  Bill Gates has said that Microsoft never needed the public capital for investment in growth; the company went public to so that its 10,000 paper millionaires could become actual millionaires.  Many of them would go on to fund or work in other start-ups, and their example has fueled many more.

Today, our IPO market is broken.  That avenue of exit has been crushed by the weight of governance regulations, especially Sarbanes-Oxley.  These rules were intended to restore confidence in our public markets.  They have, instead, prevented ordinary people from investing in maturing companies like Facebook, Twitter, or LinkedIn, and hampered the ability of companies like that to attract the talent they need to get going.  Such companies are now forced to go to private markets for liquidity, markets that are far less accessible to smaller firms than IPOs used to be.

We will never know how many Microsofts or Apples have not been able to get off the ground since 2002–the year SOX was passed–or may not in the future, because of the higher cost of securing needed talent.  Unfortunately, the people who proliferate these rules like Topsy are not accountable for what doesn’t get created.

I guess the UAW doesn’t control NASA

Posted by Marc Hodak on February 8, 2011 under Uncategorized | Read the First Comment

A coda on the Toyota scare:

A lengthy investigation by NASA into last year’s Toyota Motor Corp. recalls found that engine electronics played no role in incidents of sudden, unintended acceleration of its cars, U.S. officials said Tuesday.

The report, released by the Transportation Department to settle persistent questions over the Toyota recalls, concluded that the auto maker had identified the only two causes of the incidents: defective gas pedals and interfering floor mats.

I’m waiting now for the apologies from all those officials who jumped ahead with their public condemnations, and chased an honest company down the rabbit hole of congressional and media outrage, costing them (and ultimately all of us) billions of dollars.

I didn’t do it

Posted by Marc Hodak on February 5, 2011 under Executive compensation, Reporting on pay | Be the First to Comment

A story about Steve Eckhaus, who negotiated some of the Wall Street pay packages that made the news during the reaction to the meltdown:

Among the pay packages with Mr. Eckhaus’s fingerprints is Tom Montag‘s May 2008 deal to join Merrill Lynch, now part of Bank of America Corp. The package, which according to an SEC filing included a $39.4 million guarantee, was among those that caught the eye of regulators in the fury over pay after the financial crisis.

“It was understandable why there was anger,” says Mr. Eckhaus, but “the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors.”

Unfortunately for Mr. Eckhaus, “a confluence of economic, political and historical factors” is a difficult story for a journalist to write, an uninteresting story for the average citizen to read, and does not yield an obvious scapegoat to throw to the seething mob.

So here it is one more time:  highly paid people get what they can negotiate, just like any of us would in their place.  The fact that we aren’t in their place is less their fault than ours.