Testimony from June 15, 1999

Prepared Testimony from Ariel Kleckner, RedGorilla.com

My academic background, like that of many of my peers in Silicon Valley, is not in computer science. I
have bachelors and masters degrees in Geochemistry, and in fact was fully primed to enter a career in the
oil industry after completing my studies. Instead, I opted to enter the world of high-tech, where
opportunities and excitement were and continue to be. I haven't looked back since. It has been a
whirlwind year of 18-hour workdays, cell phones ringing off the hook and lots of coffee. I'd like to tell
you about some of the specific challenges that RedGorilla faced, that I believe point to larger issues for
the high tech industry, and for Congress, to consider.

Challenge #1: Attracting a talented workforce
We founded RedGorilla several months ago with a good idea and a team of four people with enough
enthusiasm, energy and experience to turn this idea into a business. This four-person management team
has been and will continue to be our key differentiator. There are a lot of people with a lot of great ideas
in Silicon Valley - but the management team is what truly differentiates the success stories from the pipe
dreams. The management team attracts investors, excitement and key employees to a young company.
Once we had our team in place, the real work began. We quickly ran into the greatest challenge facing
high-tech companies today: attracting talented employees. At present, there are more technical jobs in
Silicon Valley than there are technically-trained people to fill them. This has been the greatest concern of
mine as president of a young company, and a substantial mount of my time has been devoted to finding
and recruiting the fifteen highly trained engineers, programmers, graphic designers and systems architects
that comprise RedGorilla's workforce.

Industry, Congress and the Administration need to work together to ensure a capable, technically-trained
American workforce for the future. We must educate American schoolchildren at the K-12 level so that
they appreciate and enjoy science and math. And we must ensure that American workers of all ages are
trained or retrained in the skills necessary to contribute to the ever-changing high tech economy.
In my own view, strong exposure to science and math during the K-12 education is most critical and
should be our highest priority. The roundabout way that I arrived in the technology industry is not
unusual. Though things are changing now, when I was in college, students were not getting degrees in
systems administration or web design. In fact, most everyone I know in the computer industry arrived
there by happenstance. Different paths brought us to high tech, but we were all lured by the unique
opportunity to pursue the challenging, fast-changing, entrepreneurial and, yes, lucrative careers that
Silicon Valley offers. And all of us were prepared to seize those opportunities because, at an early age, we
had a strong science and mathematics education and the benefit of role models in the scientific disciplines.

Information technology professionals are the bedrock of America's high tech industry. A shortage of
qualified professionals will result in slower innovation, diminished productivity and lost business
opportunities for the U.S. economy. We must act now to ensure that we have the workforce necessary
for the challenges of the next millennium.

Challenge #2: Retaining and rewarding talent through employee ownership
We at RedGorilla have been able to assemble a talented technical team by granting stock options in our
new company. Stock options are a key factor in the ability of young technology companies like
RedGorilla to employ a talented workforce when salary dollars are scarce - they are our currency. In fact,
enabling employee ownership through stock options has long been a cornerstone for emerging growth
companies in industries like biotech, Internet and software. It has given workers a stake in the success of
their firms and fueled America's entrepreneurial culture.

Stock options are also a critical means by which emerging technology companies and venture capital firms
secure competent people to serve on their Boards of Directors. It is essential that young companies like
RedGorilla attract experienced and qualified directors, who can provide entrepreneurs like myself with the
business guidance that is crucial for a firm's survival. For my company, attracting such directors would be
impossible if we could not rely on stock options for compensation. Smaller firms often cannot pay
directors' fees in cash. And providing stock compensation has the obvious benefit of giving directors the
greatest incentive to see the company through to success.

Despite the benefits of granting stock options to employees and to directors, a threat to this practice has
emerged in the form of a proposal from a private-sector regulatory group called the Financial Accounting
Standards Board (FASB). FASB could issue two rulings this year that will have a significant adverse
impact on the ability of technology companies to use stock compensation.
First, FASB has proposed that if a company reprices its stock options and then sees a rise in the price of
the stock, the increase in value of these options must be deducted from the company's earnings. The
result: issuing stock options will become prohibitively expensive.

Second, FASB has issued a proposal that would require the expensing of options granted to members of a
board of directors or to independent contractors, meaning that the value of the options would have to be
deducted from the firm's profits.

In raising these issues today I want to make clear that technology companies recognize that financial
accounting standards must require the fair presentation of the economic substance of business
transactions. We also respect the independent standard-setting role of FASB. FASB's role is clearly to
ensure that accounting rules accurately reflect the values of liabilities of corporations for the benefit of
investors. Indeed, that is essential to technology firms, who also rely heavily on accurate financial
statements. But at the same time, I think we should look carefully at whether these proposed rule changes
really improve the financial reporting model.

More importantly, do these proposals reflect a full understanding of the technology-driven New
Economy? Do the expensing of employee stock options and options granted to outside directors
accurately reflect the assets and liabilities of these growth companies?

In 1995, FASB determined that they did not. After extensive deliberations and review of the proper
accounting treatment for stock options, FASB determined that companies issuing option grants are not
required to consider the cost of issuing them a business expense. Companies may either take a charge
against earnings based on the cost of issuing options, or describe, in footnotes to their financial statements,
the impact that stock options would have had on their earnings had they been considered a compensation
expense. Four years later, I believe this remains a sound approach that provides accurate information to
investors without adversely impacting technology companies.

The technology industry is engaging FASB constructively on these issues. We are encouraging them to
slow down and take a more comprehensive look at the entire accounting treatment of intangible assets. I
hope that we will reach an understanding on these issues.

In the meantime, I believe industry and Congress should continue to be mindful of the critical role that
public policies will continue to play in the growth of the New Economy, even in areas as esoteric as
financial accounting standards. Unlike the traditional economy, today's technology-driven economy is built
not on assets, not on physical products, but on mindshare. Even the most profitable of high- tech
companies often have little more than lines of computer code to call their own. But financial incentives
exist to allow entrepreneurs to take the risks necessary to get started in this industry.
We need to work together to keep intact these incentives that will continue to attract young Americans to
the technology industry. Granting equity to employees and directors in the form of stock compensation is
among the most important of these financial incentives.

The Next Generation of Challenges: Building and Launching an Internet Business
Now that our technical team is in place, we've begun to build our site. Our engineers and systems
architects will spend this summer working through the design and construction of RedGorilla's back-end
technology. At the same time, we are also working with the graphic designers and user interface experts
that will design the front-end, with the people that will market our new service to small businesses, and
with the team that will work hard to drive traffic to our website and acquire registered and loyal users of
RedGorilla's services once we have launched.

What makes all of this so interesting is that there are no "tried and true" methods of marketing on or for
the web. The industry is evolving so rapidly, and the technology is advancing so quickly, that we are
creating the rules as we apply them. New job titles and entire marketing departments appear overnight to
meet the growing and evolving needs of an increasingly savvy population of web-surfers. We work with
people whose sole objectives are things like "Search Engine Optimization", "Online Promotions"or
"Affinity Programs" that work to partner businesses by cross-promoting each other on their websites.
The ultimate goal of all of these efforts is to drive traffic to websites. And as the public's trust in the
security of the Internet increases, all of this traffic will drive on-line commerce: E- commerce. Electronic
commerce represents unprecedented opportunities for innovation and economic growth. It allows a small
company like RedGorilla to compete globally and to take on even large corporations.
What does this all mean in terms of policy? Simply that the potential and benefits of the Internet economy
and or E-commerce are limitless -- if they are permitted to grow. I believe that government and industry
must work together to ensure that today's fast-changing competitive environment is not choked by
excessive regulation or taxation so that the Internet economy can grow with America in the lead.
Conclusion

Today we are at the dawn of a new era, a new information age. Whether you call it the digital revolution,
the new millennium or the New Economy -- the Internet is changing more than just our ability to
communicate. We are witnessing a fundamental shift in human interaction. The Internet is a powerhouse
for economic growth, and E- commerce will drive fundamental shifts in the way people and companies do
business. What extraordinary times we live in.I greatly appreciate the Joint Economic Committee's
leadership in holding these hearings. It is essential for industry and government to share our many
different perspectives on the technology industry and to learn from each other. I am glad to be part of
what is, in a sense, a celebration of the New Economy and the technology industries. But I also believe
these hearings are an opportunity for government and industry to begin to focus together on how we can
support policies that will encourage our nation's continued technological and economic leadership.
I believe we have seen only the beginning. The rapid change, advancement and innovation that began in
Silicon Valley are spreading at Internet speed to the rest of our country and around the world. And with
these changes comes the promise of enhanced prosperity and a better quality of life for all of us. Thank
you.