It's not cash, so where does the money come from? Isn't the answer "investors"? Wouldn't their decreased share value from the dilution be the source of "value" used to pay these options to employees?
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.
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.
> 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.
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.
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.
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.
As an investor, sure, I'd want to know how much the company was diluting me every quarter by issuing new shares, but the only thing that materially affects me is the absolute value of the stock price when I want to sell (and the value of a dividend, if they have one, which most of the referenced tech companies don't).
The stock price doesn't need to reflect anything about the level of SBC. As long as people are bullish on the company's prospects at actually continuing to make real money from more and more real customers, then the price should go up, or at least not decline.
In the absence of dividends, stock prices are just a speculation game. If I'm not actually getting a share of future profits, it's just about whether the company will perform well enough (for whatever definition investors feel like that is) to increase speculative buyer demand, which increases the price.
Put another way, SBC doesn't affect money in the bank, or cash flows. A potential customer is not going to be turned off because a company gives out too much stock to its employees. It doesn't affect COGS, capex, or what the company can charge for its product.
I get why GAAP requires disclosing it, as it's a material fact regarding how the company runs its business. It's a risk: if the stock does not perform well, talent that is depending on that stock price for future income may bail, which could then hurt the company's revenue; the amount of SBC gives a window into how bad that problem could be. But docking it as a simple expense makes no sense to me.