Why stock-based compensation is not a fake expense

An enduring controversy around a remuneration practice that has fuelled the growth of the world’s most successful tech businesses for the past decade has been revived in the ashes of Wall Street's tech wreck.

So, should investors, founders, and executives, like Mr Rabois, dismiss non-cash, stock-based expenses as fake, or are they a real cost? Opendoor’s diluted shares on issue increased from 576.94 million as at June 30, 2021 to 624.96 million as at June 30, 2022. The 8.3 per cent increase in shares on issue means a theoretical $US500 million of free cashflow is only worth $US86.7¢ per share to investors in 2021, but just US80¢ per share in 2022.

By contrast, Opendoor has cratered 84.2 per cent in a performance mirrored by dozens of other businesses in the tech wreck camp. Companies that post far higher profits than cashflows are often targets of short sellers, although Opendoor’s hard to reconcile accounts are partly because of the non-cash stock-based compensation and because it must buy properties before it sells them. This means capital or financing outflows and inflows over a given period can vary wildly as residential properties may take long periods to sell.

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