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Exactly this. I find the article unconvincing as far as its conclusion is concerned. At the end of the day, shareholders pay for the stock-based compensation wi

by Denzel 6y ago

Exactly this. I find the article unconvincing as far as its conclusion is concerned. At the end of the day, shareholders pay for the stock-based compensation with dilution. There’s no expense to the “company”. As a thought experiment: say someone works for $0 in salary and 100 shares of Worthless Corp. After a year of work, our employee attempts to sell their shares, only to find no buyers. Unsurprisingly, their shares of Worthless Corp are worth $0. Did Worthless Corp incur an expense somewhere? As far as I can tell, Worthless Corp received a years worth of work at no expense.

YokoZar 6y ago
It's a bit weird to try and conceive of the corporation without thinking of its actual owners. They're the ones who the accounting is ultimately for. If Worthless Corp had 100 shares outstanding before this employee, the expense was half the company - whatever the valuation ends up being. This is not the same as "nothing", and accounting should at least attempt to reflect that - such as by placing an estimated market value on the shares.
- thaumasiotes 6y ago
  > If Worthless Corp had 100 shares outstanding before this employee, the expense was half the company - whatever the valuation ends up being. > This is not the same as "nothing" Well, in the example, the valuation ended up being "nothing", and it seems fair to say that half of nothing is indeed the same as nothing. The owner in that scenario can retake 100% equity by paying nothing for the outstanding shares.
- kelnos 6y ago
  That's only true if it happens to be true for a specific scenario. If giving some new employee 100 shares (doubling shares outstanding) actually increases the value of the company by at least 2x by some measure, then the investors holding the original 100 shares should be happy. Regardless, this is a silly, contrived example. No public company is minting anywhere close to 100% of their total share count every quarter in SBC. It'll be a fraction of a percent, probably? And investors shouldn't care, as long as the company is performing well at metrics that actually matter: acquiring paying customers, where the cost of that acquisition is less than the new customers spend. That, and things like efficiency improvements that cut costs, are the only things that actually matter, because those things are what drive stock prices up.
  - YokoZar 6y ago
    Half a percent per quarter means you've given away a quarter of the company in 14 years. That's not something an accounting rule should allow you to just hand-wave away.
- Denzel 6y ago
  > They're the ones who the accounting is ultimately for. I absolutely agree with you. I just don't agree with the conclusion this article reached: that stock-based compensation must be accounted for as an expense that affects income because, in the case where shares are issued via dilution, it doesn't affect income. Is there a better way to present this to owners than GAAP vs. non-GAAP? I think so. Have I given it much thought? Not really. I just don't agree with including dilution as an expense that makes companies appear as if they're losing money hand-over-fist. I'm open to being convinced otherwise, but this article didn't do it for me.
fred_is_fred 6y ago
Can companies just dilute or do they need to buyback shares from the market for this stock based comp? The latter does have a real cost.
- Denzel 6y ago
  That's the crux. :) I don't have an answer for you, but that seems to be why the different sides are talking past each other in this discussion. If a company can just dilute, there's no real tangible expense outside of the company transferring value from the shareholders via dilution. If a company has to buyback shares from the market, then I absolutely agree that stock-based compensation needs to be recorded on the income statement as a real expense.

by Denzel 6y ago

YokoZar 6y ago

It's a bit weird to try and conceive of the corporation without thinking of its actual owners. They're the ones who the accounting is ultimately for. If Worthless Corp had 100 shares outstanding before this employee, the expense was half the company - whatever the valuation ends up being. This is not the same as "nothing", and accounting should at least attempt to reflect that - such as by placing an estimated market value on the shares.

thaumasiotes 6y ago
> If Worthless Corp had 100 shares outstanding before this employee, the expense was half the company - whatever the valuation ends up being. > This is not the same as "nothing" Well, in the example, the valuation ended up being "nothing", and it seems fair to say that half of nothing is indeed the same as nothing. The owner in that scenario can retake 100% equity by paying nothing for the outstanding shares.
kelnos 6y ago
That's only true if it happens to be true for a specific scenario. If giving some new employee 100 shares (doubling shares outstanding) actually increases the value of the company by at least 2x by some measure, then the investors holding the original 100 shares should be happy. Regardless, this is a silly, contrived example. No public company is minting anywhere close to 100% of their total share count every quarter in SBC. It'll be a fraction of a percent, probably? And investors shouldn't care, as long as the company is performing well at metrics that actually matter: acquiring paying customers, where the cost of that acquisition is less than the new customers spend. That, and things like efficiency improvements that cut costs, are the only things that actually matter, because those things are what drive stock prices up.
- YokoZar 6y ago
  Half a percent per quarter means you've given away a quarter of the company in 14 years. That's not something an accounting rule should allow you to just hand-wave away.
Denzel 6y ago
> They're the ones who the accounting is ultimately for. I absolutely agree with you. I just don't agree with the conclusion this article reached: that stock-based compensation must be accounted for as an expense that affects income because, in the case where shares are issued via dilution, it doesn't affect income. Is there a better way to present this to owners than GAAP vs. non-GAAP? I think so. Have I given it much thought? Not really. I just don't agree with including dilution as an expense that makes companies appear as if they're losing money hand-over-fist. I'm open to being convinced otherwise, but this article didn't do it for me.

fred_is_fred 6y ago

Can companies just dilute or do they need to buyback shares from the market for this stock based comp? The latter does have a real cost.

Denzel 6y ago
That's the crux. :) I don't have an answer for you, but that seems to be why the different sides are talking past each other in this discussion. If a company can just dilute, there's no real tangible expense outside of the company transferring value from the shareholders via dilution. If a company has to buyback shares from the market, then I absolutely agree that stock-based compensation needs to be recorded on the income statement as a real expense.