The story behind the rise of Silicon Valley’s high-tech industry is frequently retold as a series of engineering feats. However, Part I of my interview with veteran CFO Paul Vilandre reveals that the innovation responsible for the rise of Silicon Valley didn’t necessarily come from a lab.

BF: You’re frequently referred to as a “Silicon Valley CFO,” but where exactly did you begin your career?

Vilandre: My finance career spans more than 35 years in high tech. I started off with IBM, joined Digital Equipment, and came out to the West Coast to work for Intel. After 7 years at Intel, I served a string of start-ups as CFO.

BF: What can you tell us about the journey from back east to out west? What changed for you from a finance career perspective?

Vilandre: When I came out west in 1978 to Intel, I had a job very similar to what I had had at Digital. It was what we called a group controller. It was a senior financial job: the number two or number three (finance) executive in both companies. I had a similar number of people working for me, which was over 100. When I was at DEC, I was lucky to get 500 options a year, and I guess I was a pretty big star on the DEC finance team. I went to Intel for essentially the same job, and I received 5,000 options. So one of the differences between East Coast and West Coast firms in high tech was a factor of ten, and this applied across the board. At DEC, in addition to the 500 options I received, I was given another 500 options to spread around to the team. This meant that only two or three other people really received options. Meanwhile, when I got to Intel, in addition to the 5,000 I received, there were another 5,000 that I was given to spread around to the team.

BF: Did the movement to expense stock options in the 1990s impact your practices?

Vilandre: You certainly couldn’t ignore it. As a general comment, particularly in America, but all the more so in Silicon Valley, the name of the game was cash management. In that sense, for the longest time stock options — which have no immediate or even midterm cash impact — were viewed from the regulatory side with a certain degree of cynicism because they carried no cash impact. So even after all of the push to get them expensed with all sorts of exotic formulas that we all had to learn — we did it because we had to — at the same time, most of the Wall Street analysts would back them out anyway because they were a noncash hit to the P&L.

At one point, I took some time off to teach a couple of years. At that time, I was the past president of the Silicon Valley chapter of FEI. I found myself in the middle of the debate surrounding expensing stock options when the CFO of General Electric, Denny Dammerman, and I ran a seminar together on stock options. The idea was to run a one-day seminar on how CFOs can defer, eliminate, or postpone the movement toward expensing stock options. We set out to figure out how we could impact and write Congress and the government to encourage FASB not to value stock options.

It was kind of memorable, because unlike on the East Coast, people don’t really travel in limousines in Silicon Valley. When Denny Dammerman came out west for the day, he arrived in a really big limousine. The same sort of thing would happen at Intel, where I was really only about three cubes away from Andy Grove. There would be East Coast visitors with limousines hovering out front for hours. I can remember one instance when the president of ITT was visiting and employees were asking why he couldn’t take a taxi.

BF: Still, is it fair to say that the more liberal use of stock options was not as much a West Coast phenomenon as it was a high-tech one?

Vilandre: Well, the East Coast–West Coast phenomenon existed even in northern California, where there was the San Francisco chapter of FEI and the Silicon Valley Chapter of FEI. The San Francisco chapter was sort of the large banks, including Bank of America and Wells Fargo, plus PG&E and traditional companies. My experience with Denny Dammerman of GE was really that he was a forward-thinking pioneer on the East Coast, because of the view that options were a nice way to motivate people because they did not have a cash impact on the P&L.

After I left Intel, I was CFO of a number of different smaller companies. I took one public and had a couple of other near misses. But I was presenting to many analysts at the time, and they would take their projections and back out noncash items. Stock options were dealt with in the same way as depreciation, allowing the analyst to come up with net cash flow. The politicians in Washington really did not understand this, and they just had no idea how options helped business.

If we jump forward to the past 20 months or so, it’s interesting because from a finance guy’s perspective, it’s really the classic issue of the P&L versus the balance sheet. A lot of finance firms overseas are more balance sheet–oriented, and they tend to loan money based on assets that are on the balance sheet. Some of that view has been traditionally shared by smokestack America, the larger steel mills and automakers, but in Silicon Valley, the P&L is king. It’s cash flow and EBITA that govern financial lending in the high-tech industry — it’s not the balance sheet. And stock options need to be thought about more broadly than just as a compensation issue. Quite often, because of the M&A activity in Silicon Valley, the stock options granted to a president or CFO would be accelerated, because within a merged company you don’t need two presidents and you don’t need two CFOs. So, often the options would have provisions for acceleration and this worked out in my favor a number of times. ###

Jump to Part II