Long-time readers know that I view excessive Stock-Based Compensation (SBC) as one of the ultimate red flags in investing. While a reasonable amount of equity can align interests, several companies have allowed management greed to spin out of control.
It is time to name and shame. In this article, I will explain why excessive SBC is a silent killer of shareholder value, expose 15 of the worst offenders and provide you with the tools to recognize this predatory pattern before it erodes your portfolio.
What is SBC?
At its core, Stock-Based Compensation is a way for companies to pay their employees, executives and directors with equity instead of cash. This usually takes the form of Restricted Stock Units (RSUs) or Stock Options. From the company’s perspective, this is a brilliant accounting move: because no cash leaves the bank account today, they can report higher Free Cash Flow and Adjusted EBITDA. This makes the business appear more self-sustaining and profitable than it actually is.
However, for the shareholder, there is no such thing as a free lunch. While the company is not spending cash, it is spending your ownership. Every time a new share is issued to an executive, your slice of the company gets smaller. This is pure dilution. If a company has 100 million shares and issues 5 million in SBC, your 1% stake just shrank to 0.95%. To keep your ownership value the same, the company’s total value must grow by 5% just to offset the new shares.
To spot this dynamic, you must look at the GAAP vs FCF Gap. Generally, a high-quality company’s Net Income (GAAP) and its Free Cash Flow should track over time. However, because Stock-Based Compensation is a non-cash expense, it is subtracted from Net Income but added back to calculate Free Cash Flow. If you see a company reporting hundreds of millions in positive Free Cash Flow while simultaneously reporting a net loss (or low margin) on a GAAP basis, the primary culprit is almost always SBC. This gap represents the shadow expense, the real cost of labor that management is hiding from the cash flow statement by paying in paper rather than dollars.
Stock-Based Compensation is not inherently evil: when used correctly, it is a powerful tool for aligning the interests of employees with those of long-term shareholders. In the early stages of a high-growth company, SBC allows a firm to preserve precious cash for R&D and expansion while still attracting world-class talent that a startup budget couldn't otherwise afford. When grants are modest, tied to strict performance milestones and given to a broad base of workers rather than just a few greedy executives, it can create a virtuous cycle. In these cases, the marginal dilution is a small price to pay for a motivated workforce that is focused on long-term value creation rather than short-term cash bonuses.
Why is excessive SBC bad?
The problem arises when Stock-Based Compensation shifts from an alignment tool to a hidden drain on your capital. Here is why excessive SBC is a silent killer of shareholder value
1. The dilution tax
Every new share issued via SBC is a direct tax on your ownership. If a company grows its business by 15% but dilutes its shareholders by 10% through stock grants, your actual per-share benefit is roughly 5%. Management often highlights total revenue growth, but as an investor, you don’t eat revenue: you eat EPS. Excessive SBC creates a massive hurdle that the company must jump over just for the stock price to stay flat. You are essentially paying a management tax that compounds negatively over time, ensuring that even if the company wins, the shareholders might still lose.
2. The profitability mirage
SBC allows companies to manipulate the perception of profitability. By paying employees in stock rather than cash, a company can report impressive Adjusted EBITDA and Free Cash Flow figures. However, this is an accounting trick. If the company were forced to pay those same salaries in cash, many high-flying tech stocks would immediately collapse into deep losses or low margins. This creates a dangerous Non-GAAP bubble where investors value companies based on cash flow that is only positive because the company is printing its own currency. When the market eventually pivots back to valuing GAAP Net Income (actual bottom-line profit), these SBC abusers face violent downward re-ratings.
3. The buyback illusion
Perhaps the most deceptive practice is using cash to neutralize dilution. You will often see a company announce a $1B share buyback and the market cheers. But if you look closer, that $1B is not reducing the share count to increase your value, it is merely buying back the shares the company just gave to management for free. This is the Buyback Illusion: the company is spending your hard-earned cash to prevent the share count from exploding. Instead of that money being used for dividends, M&A or reinvestment, it is effectively a bonus recovery fund.
4. The death spiral risk
SBC creates a dangerous dependency on a rising stock price. When a company relies heavily on equity to pay its staff, a declining stock price becomes an existential threat. To maintain the same dollar value of pay for employees when the stock is down 50%, the company must issue twice as many shares. This accelerates dilution exactly when the company is at its weakest, leading to a death spiral where the more the stock falls, the faster the share count grows. This turns a temporary market dip into a permanent destruction of shareholder capital.
5. The elite wealth transfer
A major issue that is rarely discussed is that excessive SBC often ends up feeding a small circle of top managers rather than rewarding the broader workforce. Companies frequently hide behind the excuse of attracting top talent to justify massive equity grants, but a deep dive into the proxy statements usually reveals a different reality: a disproportionate amount of that stock is concentrated at the very top of the organizational chart. When the talent being rewarded is primarily the C-suite, SBC ceases to be a tool for innovation and instead becomes a vehicle for management enrichment. As a shareholder, you are essentially funding a private wealth-creation machine for executives who are taking the upside while you bear all the downside of the dilution.
6. The myth of growth outpacing dilution
There is a common, dangerous argument that dilution doesn’t matter as long as the stock price is going up. Bulls will tell you that the shareholder value created by a rising stock price justifies any amount of new share issuance. However, this logic often fails because every business eventually matures. When a company’s hyper-growth phase begins to normalize, the aggressive SBC culture often stays the same, creating a scissor effect. Slowing growth and rising dilution cross like a pair of scissors, cutting through your returns and ensuring the stock remains stagnant even if the underlying business is still healthy.
The SBC Hall of Shame
Below are 15 stocks with high SBC intensity, based on their most recent full-year financial disclosures
1. Snowflake (ticker SNOW)
Total SBC: 34% of revenue / 142% of FCF
2021 - 2026 dilution: 21%
2. SNAP (ticker SNAP)
Total SBC: 17% of revenue / 232% of FCF
2017 - 2025 dilution: 43%
3. Atlassian (ticker TEAM)
Total SBC: 26% of revenue / 96% of FCF
2017 - 2025 dilution: 16%
4. Crowdstrike (ticker CRWD)
Total SBC: 23% of revenue / 89% of FCF
2020 - 2026 dilution: 19%
5. ZScaler (ticker ZS)
Total SBC: 25% of revenue / 91% of FCF
2018 - 2026 dilution: 35%
6. Sentinel One (ticker S)
Total SBC: 30% of revenue / 573% of FCF
2022 - 2026 dilution: 27%
7. Unity (ticker U)
Total SBC: 21% of revenue / 95% of FCF
2020 - 2025 dilution: 58%
8. Datadog (ticker DDOG)
Total SBC: 22% of revenue / 82% of FCF
2019 - 2025 dilution: 19%
9. Asana (ticker ASAN)
Total SBC: 27% of revenue / 178% of FCF
2021 - 2026 dilution: 49%
10. Monday (ticker MNDY)
Total SBC: 14% of revenue / 55% of FCF
2021 - 2025 dilution: 17%
11. Workday (ticker WDAY)
Total SBC: 17% of revenue / 59% of FCF
2017 - 2026 dilution: 31%
12. UIPath (ticker PATH)
Total SBC: 18% of revenue / 82% of FCF
2022 - 2026 dilution: 2%
13. Twilio (ticker TWLO)
Total SBC: 12% of revenue / 63% of FCF
2016 - 2025 dilution: 73%
14. MongoDB (ticker MDB)
Total SBC: 22% of revenue / 111% of FCF
2018 - 2026 dilution: 60%
15. Cloudflare (ticker NET)
Total SBC: 21% of revenue / 173% of FCF
2019 - 2025 dilution: 17%
The roster of equity-heavy firms extends well beyond these, including notable names such as GitLab, Veeva, Palantir, ServiceNow or Palo Alto Networks.
Conclusion
While SBC can be a legitimate engine for innovation when used with discipline, the companies highlighted in this Hall of Shame have transformed it into a mechanism for systematic wealth transfer from shareholders to insiders.
As an investor, your defense is simple but non-negotiable: stop looking at adjusted metrics in isolation. Always reconcile Free Cash Flow against SBC to find the Owner’s Cash Flow, and monitor the total share count like a hawk. If management is printing paper faster than they are growing the bottom line, they are not building a business for you, they are building it at your expense. Invest in companies that treat their shares like gold, not like confetti.
Protect your ownership, look at GAAP metrics and remember: if you are not at the table, you are on the menu.
Good start. Some must-have add-ons for the full pic:
1. Vesting cadence / RSU overhang (unvested awards already granted = future dilution already baked in, regardless of new grants);
2. Grant type (options vs. RSUs vs. PSUs) — PSUs tied to hard targets are exactly the "good SBC" the intro praises, but no split in table;
3. SBC trajectory — is the ratio rising or falling? Several of these are de-leveraging SBC as they scale (dismiss in point 6 w/o data).
And beyond SBC, warrants (PIPE, ....).