4 ms·

Well, I think the point is that issuing more stock already shows up in the earnings per share data so there is not a good reason to double count it. A company

by rsj_hn 5y ago

Well, I think the point is that issuing more stock already shows up in the earnings per share data so there is not a good reason to double count it. A company that issues stock to employees is not losing money, what it's doing is transferring some wealth from one group of shareholders to a different group of shareholders. This hurts the bottom line of the first group and helps the bottom line of the second, but it does not hurt the balance sheet of the company. Likewise if a company votes to give a special dividend to a preferred stock and reduce the dividend to common stock by the same amount, then this hurts one group of shareholders over another, but it does not cause the company to incur a loss. And as the company's balance sheet is unchanged. its income statement should not be changed either. The flipside is to believe that the balance sheet should be changed because the liability increases by the amount of new stock. This is false because the liability has to be valued at market value and shareholder issuance only dilutes the value of an individual stock, it does not increase the shareholder equity. This treatment where GAAP rules misvalue the change to liability from share issuance rears its head when valuing share buybacks. Here too, they are valued at the purchase price, which creates all sorts of misvaluation problems for firms and creates the opportunity for mismanaging of corporate funds by purchasing shares high and selling them low, which really should result in a loss for the company, but according to the GAAP rules there is no loss because the equity is valued by the purchase price/price at grant and does not take into account the market price. So from this one bad rule comes other misvaluations that distort the balance sheet of a company and impede financial analysis. And all of this stems from a desire to discourage corporate behavior in share issuance rather than from a desire to accurately value the company. So I'll go by the non-GAAP figures.

fshbbdssbbgdd 5y ago
Suppose Uber issued $1B of stock, sold the stock on the open market, then gave employees a $1B bonus. Did Uber incur a $1B expense by paying the bonus, and if so, did they also earn an offsetting $1B in revenue by selling this stock, so this set of transactions should net to zero on the earnings statement? Isn’t this the same thing as stock compensation with an extra step? What am I missing here?
- trepanne 5y ago
  Selling stock doesn't impact the income statement; it is NOT revenue. It is capital raised. Your series of transactions would net to debit expense $1B, credit equity capital $1B. It would definitely fuck up your earnings, as it should. Stock compensation is compensation and should be expensed. It's not just GAAP, it is plain common sense. The dilutive effect on EPS isn't any kind of double-counting. It's just a proper accounting for the way the shareholders are constantly bleeding value to sustain normal operations.
- rsj_hn 5y ago
  As you know, the sale of stock is a capital account operation, so just giving the money to an employee appears to be a current expense with no offsetting current revenue. It would be like selling off a share of your future profits to make current payroll (which is what it is). But what you are missing is that many modern companies, and especially software companies (2/3 of labor expenses are R&D), have capital that is basically IP created by their employees, and so just as it's a good idea to sell equity to buy some metal stamping machine, and this does not dilute the equity of the firm or cheat any shareholders, so it's also a good idea to sell equity to hire the person to write your application, or create a vaccine, or design a new engine, and this also does not dilute equity or hurt the company. In fact many times when key employees leave the share price of a company falls and the shareholders are more than happy to vote for boards that give stock grants to key employees that cause the company to earn more long term profits. And ultimately this is something that GAAP just can't handle due to its antiquated distinction between labor and capital investment -- under GAAP you can't expense a labor R&D expense over a period of time. You have to take the charge all in the same year. So this gives you misleading accounting results, and this is also why savvy investors look at the non-GAAP results and then they have to use their judgement to determine whether the IP that the company's employees are creating will generate the expected long term returns. Moreover if you are such a company, it makes excellent sense to finance R&D by selling stock, and for most companies R&D is almost entirely labor compensation. So ultimately GAAP is just out of touch with what capital investment means in the modern world - capital investment happens by paying people a lot of money to create IP for you, and not by purchasing tractors. Similarly stock analysts who view labor as purely a current expense and not an investment are also out of touch with many industries. That wont work in Biotech or Software or SpaceX or really any firm that does a lot of R&D. So let the stock market decide whether those equity sales are funding compensation that will generate the return or whether they will merely dilute -- the investors are the ones who need to price this, it can't be mechanically determined via GAAP rules designed to track the balance sheet of a 19th century coal plant.
TheCoelacanth 5y ago
> A company that issues stock to employees is not losing money, what it's doing is transferring some wealth from one group of shareholders to a different group of shareholders. They are losing money via dilution for the shareholders at the time that they issued the stock.
- rsj_hn 5y ago
  > They are losing money via dilution for the shareholders at the time that they issued the stock. I'm not sure what you mean by "losing money via dilution". Companies don't lose money via the market repricing their shares. Shareholders may lose money. But in aggregate, there are also more shareholders, so one group of shareholders loses some money and another group of shareholders gains some money. In aggregate, shareholders don't lose money.
  - trepanne 5y ago
    > In aggregate, shareholders don't lose money. Happily, the FASB isn't fooled by this particular sleight-of-hand. Not anymore, at any rate; they quit letting themselves get bamboozled by Silicon Valley flim-flam accounting for options more than 15 year ago. If the shareholders have constant ongoing dilution due to continual share issuance, they have run just to stay in place. This is pretty straightforward, and what the GAAP are communicating to FS readers. You have a comp expense, of course (you gave something valuable to an employee instead of selling it for cash), and you also have the dilution, without even getting the cash in return. It's the only appropriate way to account for it. It is a very expensive form of compensation.
    - rsj_hn 5y ago
      It is not flim-flam. The shareholders elect a board, and the board has to approve stock based compensation. The shareholders price shares based on this expected dilution so no one is being fooled and there is no sleight of hand. All of this is very public.
      - 5y ago

by rsj_hn 5y ago

fshbbdssbbgdd 5y ago

Suppose Uber issued $1B of stock, sold the stock on the open market, then gave employees a $1B bonus. Did Uber incur a $1B expense by paying the bonus, and if so, did they also earn an offsetting $1B in revenue by selling this stock, so this set of transactions should net to zero on the earnings statement? Isn’t this the same thing as stock compensation with an extra step? What am I missing here?

trepanne 5y ago
Selling stock doesn't impact the income statement; it is NOT revenue. It is capital raised. Your series of transactions would net to debit expense $1B, credit equity capital $1B. It would definitely fuck up your earnings, as it should. Stock compensation is compensation and should be expensed. It's not just GAAP, it is plain common sense. The dilutive effect on EPS isn't any kind of double-counting. It's just a proper accounting for the way the shareholders are constantly bleeding value to sustain normal operations.
rsj_hn 5y ago
As you know, the sale of stock is a capital account operation, so just giving the money to an employee appears to be a current expense with no offsetting current revenue. It would be like selling off a share of your future profits to make current payroll (which is what it is). But what you are missing is that many modern companies, and especially software companies (2/3 of labor expenses are R&D), have capital that is basically IP created by their employees, and so just as it's a good idea to sell equity to buy some metal stamping machine, and this does not dilute the equity of the firm or cheat any shareholders, so it's also a good idea to sell equity to hire the person to write your application, or create a vaccine, or design a new engine, and this also does not dilute equity or hurt the company. In fact many times when key employees leave the share price of a company falls and the shareholders are more than happy to vote for boards that give stock grants to key employees that cause the company to earn more long term profits. And ultimately this is something that GAAP just can't handle due to its antiquated distinction between labor and capital investment -- under GAAP you can't expense a labor R&D expense over a period of time. You have to take the charge all in the same year. So this gives you misleading accounting results, and this is also why savvy investors look at the non-GAAP results and then they have to use their judgement to determine whether the IP that the company's employees are creating will generate the expected long term returns. Moreover if you are such a company, it makes excellent sense to finance R&D by selling stock, and for most companies R&D is almost entirely labor compensation. So ultimately GAAP is just out of touch with what capital investment means in the modern world - capital investment happens by paying people a lot of money to create IP for you, and not by purchasing tractors. Similarly stock analysts who view labor as purely a current expense and not an investment are also out of touch with many industries. That wont work in Biotech or Software or SpaceX or really any firm that does a lot of R&D. So let the stock market decide whether those equity sales are funding compensation that will generate the return or whether they will merely dilute -- the investors are the ones who need to price this, it can't be mechanically determined via GAAP rules designed to track the balance sheet of a 19th century coal plant.

TheCoelacanth 5y ago

> A company that issues stock to employees is not losing money, what it's doing is transferring some wealth from one group of shareholders to a different group of shareholders. They are losing money via dilution for the shareholders at the time that they issued the stock.

rsj_hn 5y ago
> They are losing money via dilution for the shareholders at the time that they issued the stock. I'm not sure what you mean by "losing money via dilution". Companies don't lose money via the market repricing their shares. Shareholders may lose money. But in aggregate, there are also more shareholders, so one group of shareholders loses some money and another group of shareholders gains some money. In aggregate, shareholders don't lose money.
- trepanne 5y ago
  > In aggregate, shareholders don't lose money. Happily, the FASB isn't fooled by this particular sleight-of-hand. Not anymore, at any rate; they quit letting themselves get bamboozled by Silicon Valley flim-flam accounting for options more than 15 year ago. If the shareholders have constant ongoing dilution due to continual share issuance, they have run just to stay in place. This is pretty straightforward, and what the GAAP are communicating to FS readers. You have a comp expense, of course (you gave something valuable to an employee instead of selling it for cash), and you also have the dilution, without even getting the cash in return. It's the only appropriate way to account for it. It is a very expensive form of compensation.
  - rsj_hn 5y ago
    It is not flim-flam. The shareholders elect a board, and the board has to approve stock based compensation. The shareholders price shares based on this expected dilution so no one is being fooled and there is no sleight of hand. All of this is very public.
    - 5y ago