Lies, Damned Lies, and Stock-Based Compensation
Here's a thought experiment that helped me reason through SBC and GAAP.<p>Scenario A: Company hires an engineer with a base salary of 100k/year, and 100k/year worth of SBC.<p>Scenario B: Company convinces an investor to invest 100k/year... and also hires him as an engineer with a base salary of 200k/year.<p>From a business fundamentals and margins perspective, the two scenarios are identical. And yet, in scenario A, the company is spinning their non-GAAP annual expense as being 100k. Whereas in scenario B, the company wouldn't even try to spin their annual expense as being anything other than 200k.<p>The above thought experiment becomes particularly powerful if the hypothetical company has no other expenses and an annual revenue of $150k. Using the non-GAAP estimates from scenario A can mislead investors into thinking that the company has a very healthy gross margin, and is a lucrative investment. Whereas the actual GAAP numbers from both scenarios A and B, make it clear that the business is not profitable at all.