Always love your posts my friend. I know you’ll be getting to this on your next post --- a recommendation to look at dilution as the better way to evaluate/adjust FCF.
In other words, why penalize companies with this artificial SBC expense that often has no relationship to the current true cost of those RSUs and stock options? -- since they are costed out based in the timing of an IPO, for example. And I agree in principal -- the dilutive effect is more meaningful.
But the problem with that is that you’re comparing two different things -- 1) FCF in a period, and 2) the total dilutive effect over time of the employee shares whose cost never hit FCF (and never will) even though the costs are real to all shareholders.
It seems to me that the best way to truly understand the “cost” of the stock-based compensation is to “ price” the dilution at today’s stock price value and amortize it -- over some reasonable period of time reflecting how those employee shares vest. A kind of repricing of thirst SBC expense based on current values (rather than say the IPO value).
Great post as always. I am wondering -- does this imply that all of the SaaS companies that round-tripped up to 50x ARR and back down to <10x are "overstating" SBC expense since in most cases they did the bulk of their hiring in ~2021 at peak stock prices? Put another way, isn't almost every public SaaS company (at least the growthier ones) a "Company 1" rather than a "Company 2", right now at least?
potentially, but some companies are issuing even more RSUs to make employees whole, which is a slippery slope. Part of the problem is if they don't do this then employees will leave and join another public company that has also seen stock prices take a hit but they get RSUs pegged to a $ amount based on equity benchmarks.
The ones that can avoid this and limit turnover will be relatively better off
Always love your posts my friend. I know you’ll be getting to this on your next post --- a recommendation to look at dilution as the better way to evaluate/adjust FCF.
In other words, why penalize companies with this artificial SBC expense that often has no relationship to the current true cost of those RSUs and stock options? -- since they are costed out based in the timing of an IPO, for example. And I agree in principal -- the dilutive effect is more meaningful.
But the problem with that is that you’re comparing two different things -- 1) FCF in a period, and 2) the total dilutive effect over time of the employee shares whose cost never hit FCF (and never will) even though the costs are real to all shareholders.
It seems to me that the best way to truly understand the “cost” of the stock-based compensation is to “ price” the dilution at today’s stock price value and amortize it -- over some reasonable period of time reflecting how those employee shares vest. A kind of repricing of thirst SBC expense based on current values (rather than say the IPO value).
But maybe I’m stealing your thunder?
Similar thoughts to what I have! Coming next next :)
Great post as always. I am wondering -- does this imply that all of the SaaS companies that round-tripped up to 50x ARR and back down to <10x are "overstating" SBC expense since in most cases they did the bulk of their hiring in ~2021 at peak stock prices? Put another way, isn't almost every public SaaS company (at least the growthier ones) a "Company 1" rather than a "Company 2", right now at least?
potentially, but some companies are issuing even more RSUs to make employees whole, which is a slippery slope. Part of the problem is if they don't do this then employees will leave and join another public company that has also seen stock prices take a hit but they get RSUs pegged to a $ amount based on equity benchmarks.
The ones that can avoid this and limit turnover will be relatively better off