National Venture Capital Association

November 1, 2002

via Electronic Mail

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609

    Re: File No. SR-NYSE-2002-46, Proposed NYSE Rule
    Change on Shareholder Approval of Stock Option Plans

Dear Mr. Katz:

The National Venture Capital Association (NVCA)1 is pleased to comment in support of the proposal to require shareholder voting on all stock option plans.

The connection between venture capital and stock options is important. Venture capitalists remain firmly committed to the proposition that broadly distributed employee stock options build shareholder value by increasing earnings far more than they increase the number of outstanding shares. The venture community's collective experience in the use of stock options as a means of aligning the interests of employees and shareholders has promoted the trend toward more broadly based stock option plans in publicly traded companies. Venture capital has played a key role in the development of many successful businesses that are now publicly traded on the major exchanges.

Recent instances where stock options contributed to a misalignment of the interests of senior executives and long-term shareholders have caused many organizations, including NVCA, to re-assess its views regarding shareholder approval of stock option plans. Where, heretofore, we have strongly supported the retention of the broad-based exception to the rule requiring shareholder voting on all stock option plans, we now support the view that shareholders' concerns about dilution can only be allayed by a shareholder vote on all stock option plans. This proposal is one of a number of reforms in accountability and transparency regarding stock options that NVCA supports.

We hasten to reiterate that venture capitalists, as investors in entrepreneurial businesses, believe that stock options are a critical part of the culture of successful entrepreneurial businesses. However, with publicly traded companies, striking the right balance between shareholder concerns with dilution and the long-term benefits of broad-based stock option plans is challenging. Venture capitalists certainly do not see the grant of stock options as a zero-sum transaction. Indeed, they see stock option plans as accretive to, rather than dilutive of, overall shareholder value. Nor do they see stock options as a measurable corporate expense that should be dealt with through accounting rules.

On the other hand, as investors who grant stock options, venture capitalists appreciate the need to control the level of potential dilution inherent in stock option plans. A new respect for these concerns regarding publicly traded companies is one reason NVCA now supports the requirement for shareholder approval of all stock option plans for publicly traded companies.

A second and equally important reason for our support is that shareholder voting on all plans will improve accountability of publicly traded companies and help to restore the trust of the investing public. Combined with better disclosure of potential dilution, improved accountability will help to ensure that the genuine benefits of broadly based stock options are preserved.


NVCA supports the NYSE's proposed rule to require shareholder approval of all stock option plans as an appropriate step toward improved accountability regarding stock option plans. NVCA believes that shareholders, fully informed of the costs and benefits and fully empowered to manage the potential dilution from broad based stock option plans, will continue to support these important tools of entrepreneurship and shareholder value.

NVCA would be pleased to provide further input.

Sincerely yours,

Mark G. Heesen

1 The National Venture Capital Association (NVCA) represents more than 450 venture capital and private equity firms. NVCA's mission is to foster the understanding of the importance of venture capital to the vitality of the U.S. and global economies, to stimulate the flow of equity capital to emerging growth companies by representing the public policy interests of the venture capital and private equity communities at all levels of government, to maintain high professional standards, and to provide research data and professional development for its members.

NVCA member firms provide the start-up and development funding for many companies that go public. Venture funding is a major factor promoting innovation and entrepreneurial businesses. In 2001, venture capital funds invested $41 billion in 3,000 companies. Eighty-five percent of these companies were in information technology, medical/health or life sciences. The success of venture investing is encouraging greater capital flow to these investments. While venture capital investing has fallen off over the past two years from its high in 2000, venture capitalists continue to invest in 2002 and will likely invest the fourth largest amount ever in the history of venture capital this year. Venture capital firms now have an estimated $265 billion under management, up from $30 billion in 1990.