Kudos and questions

[Jeff Bone]

Tom,

I took the liberty of visiting your home page;  indeed, your creds are impeccable, far be
it from me to question them.  Clearly your philosophy of executive compensation is
informed, though I still question your conclusions -wrt- Dell's comp.  Aside, I wasn't
aware that we had such luminaries in our little playpen, here. :-)

I therefore have to ask:  why is your analysis so biased?  It appears to totally ignore
the fact that executive compensation is the result of a market process, not something as
simple, ugly, and self-serving as raiding the petty cash drawer.  As you are clearly
aware, comp packages always the result of a consensual process, a negotiation between the
executive and the shareholders' fiduciaries, i.e. the board of directors.  It is a
continual process, where compensation packages are reviewed and revised on a regular
basis.

Further, why does your analysis rest on such a non-issue, i.e. the dilutionary effect of
continuing option grants to top executives?  Note that all equity-based compensation has
exactly that effect, regardless of the receipient of the options or the mechanism of
delivery (grant or priced, etc.)  We seem to have a common understanding that incentives
such as continuing participation in upside on the part of various contributors are
required in order to achieve adequate performance;  why do you seem to feel this is
appropriate for ICs but not for executives or, particularly, founder-executives?

You also seem to neglect the fact that the practical value effect of these options is
completely unknown;  you claim that such option grants to top execs "devalue" the
shareholders' stakes, however this is entirely speculative.  It assumes identical stock
price performance with or without the chief executive's involvement.  (Let's assume that
the market process is working, the price is right, and that it's the required price for
continued involvement of said exec.)  There's absolutely no rational justification for
assuming that price performance would be identical with or without a given CEO, or even
similar from a trend perspective;  indeed, it ignores anecdotal evidence suggesting that
the effect of CEO-as-figurehead on stock price can be profound.  (Look at Apple's price
performance over the last two decades.)  Are Dell's shareholders in a better postition
value-wise with Dell in place, receiving the options he receives, or with another
non-founder CEO?  (Who surely would also get options, btw.)  It's absolutely impossible
to say.

Note that indeed this is a very controversial issue.  Many founder-execs either choose or
are forced to accept no further participation in option streams beyond their original
stakes, which are diluted away forever;  in my experience, this is a rather "old school"
point of view that stems from a time when cap structure gradients were more extreme.  In
the last couple of decades, I think we've seen a flattening of cap structures...  where
it might have been common for a single founder or small group of founders and close-in
private investors to retain voting control of a company almost to or even through
liquidity in ages past, that would appear to be extremely rare these days.  In these
days, the philosophy of "the founder had enough to begin with, we can dilute him away
'til the cows come home" *may not be a practical incentive,* given that founders have to
give up larger and larger parts of their companies in order to attract the talent and
dollars they need during the private stage of life.  "Smaller piece of a bigger pie"
works, sure;  but it assumes that the volume of each slice continues to grow.  Cutting
founders out of the option stream in perpetuity threatens this notion for them and them
alone.

Why is this issue always exclusive to founders?  There's never much hub-bub about giving
option-based compensation to non-founder execs brought in down the road.

(Part of the reason I wonder about this is that I've run into it in my own ventures;  I
have a strongly-held belief in having flatter than normal cap structures in early-stage
companies, and have built at two companies in Austin with the flattest cap structures
around, because I believe that's the right thing to do.  However, I see the value of the
founders / entrepreneurs as being ongoing, and recognize that in light of flat cap
structures ongoing option grants to founders may indeed be necessary to maintain the
proper incentives and participation over the long haul.)

Even I would have a philosophical problem with a majority individual using a puppet board
to dilute away the interest of other shareholders over time, but that's not happening
here.  By your own numbers Dell holds 14% of the company;  that's not enough for fiat.
So why present it as such?  Why denounce Dell for attempting to maintain a steady-state
if overall minority level of ownership in the company he built by requesting continuing
equity-based comp?  Why ignore or downplay the fact that this situation is indeed
agreeable to the majority of his shareholders, who appear to feel that this is an
adequate reward for the increasing value experienced by the stock under his stewardship?

At the end of the day, this would all appear to be an issue between Dell (or any other
top exec) and the shareholders.  If we're shareholders having this conversation, then
that would seem to me to be a fine and valuable thing to talk about;  but if we aren't,
then we're just being busybodies critiquing a consensual process in which we have no
vested interest.  If the latter, then surely we should leave well enough alone and let
the executive in question get back to the business of building shareholder value in
whatever way he sees fit.

Just a few random questions and thoughts;  I'm sincerely interested in your perspective,
because now that we've ruled out naivete I'm trying to figure out if the issue for you is
political, moral, or just entrenched old-school "founders don't get options" thought.
:-)

jb