Benjamin Tan's avatar
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Stock-Based Compensation at Tech Companies - Hot Topic
With a softer economy, many technology companies like Meta ($META) and even Salesforce ($CRM) are reducing or pausing headcount. Bargaining power when negotiating employment terms is likely to shift in favor of employers again after years of wage inflation. But in the long-run, smaller companies issuing significant equity compensation will likely to remain a feature, not a bug. It is still an effective recruitment tool to conserve cash capital and provide proper incentives to attract or retain risk-takers to fight uphill battles. For smaller players like Coupa ($COUP) and Jfrog ($FROG), it is better to be generous with stock compensation and have the right people share a growing pie, than to withhold upside and end up with a sub-par army fighting a losing battle against establishments.

So, GAAP and non-GAAP numbers reported by tech companies can be in stark contrast. For FY 2022, $ZS GAAP net loss was $390mn, versus a non-GAAP net profit of $101mn. SBC was $430mn, which accounted for 87% of the adjustments.

Read on via the article below and subscribe to my weekly blog, Consume Your Own Tech Investing:


Dave Ahern's avatar
Great article! Two questions spring to mind. What is an acceptable level of SBC? And what do you think about the dilution issue?
Benjamin Tan's avatar
@ifb_podcast I think wage inflation in tech, combined with a tight labor market in the last few years, definitely pushed the boundaries of SBC in the fight for talent. Issuing equity - to recruit or to raise capital - is a feature of any growing company. Dilution becomes an issue when the pie is not growing as fast, then everyone (including founders + employees + investors) loses. I believe tracking revenue per share over years is a good way to look at value creation more fairly. For $ZS, for all its bad rep for paying 40% of rev in SBC, grew revenue from $190mn in FY 2018 (with S/O of 120mn) to $1.1bn in FY 2022. Rev more than 5x but S/O only increased to 143mn. Rev/share compounded at almost 50% over that 5-yr period. So it isn't dilutive when management can employ equity effectively
Devin LaSarre's avatar
@consumeowntech I'd argue revenue is not a good metric to judge value creation on. Plenty of ways to grow revenue that are value destructive on an absolute basis.

I do agree 'SBC' gets thrown around like a dirty word. The only thing dirty is when people don't account for it in their valuation.
Benjamin Tan's avatar
@devinlasarre Unit economics and operating leverage are important metrics to get a fuller picture, but those are harder to compare across multiple companies at different stages of growth and degrees of profit reinvestment. Rev/share is just convenient measure for comparison across growth companies that are issuing equity (including SBC) to fuel topline. Growth at all cost with bad economics = value destruction for sure.
Brett Schafer's avatar
I agree. It is not that SBC is "good" or "bad" but just needs to be accounted for properly when valuing a stock. I think a lot of people go too hard one way or the other with this topic
Rahul Setty's avatar
@ccm_brett Product of a bear market (which also increases the dilution as a % of share count via stock price compression)
Benjamin Tan's avatar
@rahulsetty SBC as a percentage of rev will likely come off the highs that we saw - pretty sure companies are getting the same complaints from institutional shareholders in this bear market !

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