I think the right way to handle that in a chart like this would be to include the stock comp on both the “funds raised” and “cumulative losses” columns, or neither of the columns.
When you issue stock comp, you are trading dilution for money, just like you are when raising from VCs or doing an IPO. The money is just spent on paying an employee immediately instead of sitting in the corporate treasury for a while.
If you include the spending part of the stock comp as a “loss”, but don’t include the creation of that stock as a “raise”, you end up with these nonsensical results.
Well said. Though here in the US a significant (sometimes) portion of employee costs lies in stock based comp. And many times, co's present non-GAAP numbers that strip out this part from their income (which inflates their income, and sometimes that can be the difference between making a profit or a loss). The stock based comp gets reflected in increased share count over time, so it will show up in the stock price, just not in the presented non-GAAP income.
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.
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.
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.
Stock-based compensation is counted as an expense in the accounting rules used by public companies (GAAP).
So if they give $100M in stock awards, that’s a negative $100M on the company’s profit & loss statement, even though it’s not actually paid in cash by the company.
For that reason many tech companies also report non-GAAP numbers where the profit looks nicer because they can leave out stock-based compensation (and anything else they feel like they can get away with).
But GAAP is handling it correctly. The dilution that stockholders will experience from stock-based compensation is very much real. And the earnings should reflect that.
Non-GAAP numbers are almost always done to deceive investors. In the dot-com days, it was EBITDA. These days, it's earnings before stock-based compensation.
A very large chunk of GAAP losses are attributable to stock comp expense (a quick and easy way to check cumulative profits/losses is looking at the balance sheet’s equity section for “accumulated deficit”) which still gets counted as an expense but since it’s non-cash it’s not a drain on whatever the company has raised. If you look at Uber’s last three FY’s, they’ve cumulatively reported losses of about $16 billion, and stock comp has been about $6.5 billion of that. For the vast majority of public companies this isn’t as material but for all these VC-backed, Bay Area-type tech companies they have this systemically dysfunctional culture where they dole out stock and options to no end.
There's very rare cases where it's justified; e.g. if you want to show a drop in company profits from $60.0B to $57.0B, you might want to cut the y-axis so that you're showing more detail of the loss over time (maybe so that you can correlate to the CRO's lame new "motions" that they started in January). I do think it should always be called out visually when doing that though.
> In my example, the dilution happened in 2009 but affects GAAP profitability in 2013.
Then Twitter should restate its non-GAAP results for 2009-2013 to subtract out the stock grants from previous quarters' results.
The numbers have to add up. If you exclude something from the non-GAAP results for one quarter, then it has to appear in the non-GAAP results for another quarter. The money cannot simply disappear into thin air.
If a company reports non-GAAP results, then it should be required to report a cumulative difference vs. GAAP. Over time, the cumulative difference should go to zero, as the timing differences are worked out.
> Why would you value their stock at 0 to get that 'actual' number?
It's a one-time non-cash expense. Allocating to a single quarter is an accounting convenience.
Stock comp represents an economic cost--shareholders are diluted by it. But allocating it now or then, here or there, is arbitrary. As such, when making longitudinal statements (e.g. is Uber's economic position improving or receding), stripping out such items is standard.
When you issue stock comp, you are trading dilution for money, just like you are when raising from VCs or doing an IPO. The money is just spent on paying an employee immediately instead of sitting in the corporate treasury for a while.
If you include the spending part of the stock comp as a “loss”, but don’t include the creation of that stock as a “raise”, you end up with these nonsensical results.
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