Stock-based compensation

Live from Schenectady, New York, it's SAS Talk with the Metrics Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, EIR at Balderton Capital, independent consultant, and the author of CalBlog.

And together we are the Metrics Brothers.

And we go together like EBITDA and non-cash expenses.

Oh, wait a minute. We're doing accounting similes again?

Sure as God made little green apples, Ray. We're going to do food next time.

I see what you did there, but you're still doing accounting similes because you want to talk about your favorite non-cash expense, don't you there, CAC?

Yes, I do, Ray. On today's episode, I want to talk about SBC, stock-based compensation. And as non-cash expenses go, It's a big one.

But don't we understand this one already, Dave?

Well, I thought I did, Ray. And then I talked to you the other day in the prep session and got totally confused. So now we need to do an episode on this, my friend.

Well, I hear that a lot. I'm the master of making simple things complex. But before we do this episode, let's hear a word from our sponsor. The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Groth Wright have put the Metrics Brothers podcast on hiatus for remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave at Kellogg and Ray on LinkedIn at Ray Reich. Thank you so much for listening to the Metrics Brothers podcast. Okay, Dave, this is such a complex topic. I'm going to ask you to kind of lead this session, and I'll try to add value as we go along.

Okay, well, thanks, Ray. In today's session, we're going to talk about stock-based comp, and unfortunately, to do that, we have a primer that might take as long as a normal episode. So we're going to go through and make sure we understand what stock-based comp is before we kind of offer some opinions on it. Largely, I'll be working on my experience as a former CEO and running option pools and granting options, etc. But I'm also going to be relying on 3 posts today that I think are good reading for the audience. One by CJ Gustafson of Mostly Metrics fame, The Silent Valuation Killer: Stock-Based Comp. And I'd actually like to quibble with that title later if we talk about it, because I don't think it actually kills your valuation. I think it kills your share price. Janelle Tang— and by the way, if you understand that at the end of the episode, then we've been successful. The second one, Janelle Tang, The Next Big Tang. I love the name of her blog, Unraveling SPC Overhang in SaaS. And as she discovered already, Ray, she started out trying to write one post and had to write 2. And that's the way I feel about this episode. Finally, Tane Jaipuria in Tane's newsletter has a great post called Lies, Damned Lies, and SBC. So, I would recommend that the audience take a look at those 3 posts. But before we dive in, we need to cover a ton of basics first.

Okay, well, let's start with the very basic. What is stock-based compensation?

Okay, start at the top. Stock-based compensation is an expense associated with employee compensation paid not in dollars but with stock. So for example, just say I pay you $200,000 a year in cash, and then on top of that— and this is very common in startups— I give you stock options at an early-stage startup, or at a later-stage company or public company, I give you RSUs, restricted stock units. But both of those are compensation, right? I'm paying you something to do your job, but no cash is directly changing hands.

Gotcha. And there's a lot of other types out there, but these are the 2 most commonly used. You know, you hear things about employee stock option plans or ownership plans. But for today, I think we should focus on the 2 that you highlighted, Dave.

Yeah, there are some more secondary forms of compensation done via stock, as Ray mentioned. But the 2 that drive most of the expense are certainly in public companies, RSUs. And in private companies, stock options. So, the question is, do companies pay for this compensation in the classical sense? And the answer, unfortunately, is yes and no. No, in the sense that if you exercise an option to buy a share of stock for $1 when it's trading for $30, the company hasn't given you any cash. In fact, you've given the company cash. You gave the company a dollar to buy that share. So, there is cash trading hands at an option exercise, but it's the other direction, right? Now, the reason stock options are so beloved by employees of high-growth companies is you're paying the company $1 for a share that in this example is worth $30 in the open market, right? So, I always think about stock options as kind of foregone money that, hey, if I'm the company, I just sold you a share, Ray, for a buck that I could have sold to somebody else in the open market for $30.

Right.

So, I kind of have $29 in foregone money. The same thing holds true for RSUs. If you vest a share of an RSU grant and it's worth $30 when you vest it, and something like 95% of all RSUs are sold on the day they vest, right? So, one of the— this is a quick aside, but one of the myths about stock-based comp is it aligns employee and shareholder interests by making sure that employees, you know, kind of have skin in the company game. And it's true indirectly. And I'd say it's actually true for stock options, but for RSUs, people almost never hold them, right? So you vest this share via an RSU, it's worth $30. I've given you something for free at this point. I'm just handing you a share that I could have sold to somebody else for $30. So once again, we have this notion of the $30 in foregone money.

Okay, so in that example, right? $1 you got the option for, it's worth $30. How is that $29 difference kind of treated on a company's financial statement, Dave?

Yeah, so you might think they just run, oh, in that quarter, let's just put the $29 down, right? In the quarter that you exercise the option in that example, isn't that an expense right then for $29? And if Dave were the king of all accountants, I might argue that that's Not a bad solution, 'cause that's actually what happened. The problem is that's not at all, at all, at all how it works. And the reason it doesn't work that way is one of the kind of fundamental principles of accounting called the matching principle, right? And the matching principle in accounting means you need to match expenses with revenues and match the accounting treatment. Is this really a matching principle thing? I think it's matching principle. That I want to match the expense With how it's taken, right? That basically, if I give you a 4-year option that vests over 4 years, you don't get all the value in one day. It's not a one-pop expense that happens once on one day in one quarter. It's that, no, no, no, wait a minute. This is part of Ray's compensation for that 4-year period. So, I should kind of amortize that expense over those 4 years. Now, the problem is, of course, is that I don't really know what that expense is going to be. I don't know how much foregone money I'm giving up, right? Particularly with an option. So what they do instead, and this is very accounting-ish, is they say, wait a minute, we need a value for it right now. I'm granting Ray a stock option or an RSU. I need to determine some value for that right now. And then I'm going to take the expense associated with that value over the useful economic life, i.e., over the 4-year vest period for stock or a 4 or 5-year vest period for RSUs. But the key to the formula is you don't get to look at it at the end like I did in my example and just go, oh, that cost us $29 because I could have sold it to somebody else. That's not how you do it. You have to say at the beginning when this is all unknown, in effect, let's assign a value to that grant and then let's kind of take it over typically a 4-year period. Questions?

No, because I think I would take us down a rathole if I did. So let's keep moving.

Okay. So the question then is, how do you build those valuations? And I don't want to get into the detail of it, but for options, you basically use an option pricing formula called the Black-Scholes model that will— it can tell you, it's used by options traders every day, the value of an option given the strike price, given the volatility, given the time period, it will tell you what the option's worth. So it's kind of a statistical almost, or a probabilistic way of saying this option should be worth X. It's kind of a funny way to run things through your P&L, right? In my mind. And this is one of my objections with expensing stock options is we're kind of getting this almost probabilistic value that it'll probably be worth this. But in reality, it might be worth nothing, right? Let's just say we think it's probably worth $40,000. So we take $10,000 a year over 4 years and say the stock goes directly from the FMV I granted or the strike price I granted it, you know, say I granted it a buck a share. Say it goes directly to a penny a share. Right? Then in reality, it's costing me nothing, but I am still every year taking $10,000 in expense because I thought it was likely to be worth $40,000. For RSUs, it's a little more straightforward, but the Achilles heel with RSU valuation is the value is determined at grant time, not the vest time. So, if I give you a 4-year RSU and the stock is worth $10 a share, On the day I grant it. I'm going to take the total value of the RSU and take it over 4 years, even as the stock rises. And in my example, say, you know, the day you have one of the vesting periods happen, it's worth $30 a share. So in that case, I'm underreporting, right? I'm underreporting the actual expense, by the way. And conversely, if the price goes from $10 a share to $1 a share, I'm overreporting it because I just gave you something for $1. That, that in our accounting treatment we thought would be worth $10. So there's some serious kind of philosophical questions about how accurate are these valuations. Now, do you have questions?

I don't. And I was going to ask a question about how does this get treated on the balance sheet with additional paid-in capital? But that also probably would take us down a whole different accounting rabbit hole.

Yeah, I want to stay focused on the income statement here today, Ray, because we're talking really about expensing stock-based compensation, and that's an income statement affair. So let's do that. Let's introduce people to the notion of a non-cash expense in case people don't get that, because SBC is a non-cash expense, meaning cash doesn't change hands when you give people stock-based comp, as the examples above have provided. And I just want to quickly remind people of the classic example of non-cash expense, just to get the concept in your head, which is we build a plant or a factory and we pay $30 million to build it and it's going to last us 30 years. So in year 0 or year 1, depending on how you count, I spend $30 million in cash, right? The cash balance goes down by $30 million. But if you look at the P&L for that company, you are— if you look at the statement of cash flows, cash goes down by $30 million in year 1, right? And then nothing happens for the next 29 years. If you look at the P&L, it's almost the opposite. We go, hey, wait a minute, you spent $30 million in year 1. But we're going to capitalize that and say it was really an investment. You built something that's worth $30 million. You effectively traded $30 million of cash for $30 million worth of factory. And that factory becomes $1 million less valuable every year because it only lasts 30 years. So you would have what's called a depreciation expense of $1 million a year on the P&L. And that would be a—

Non-cash expense.

Non-cash expense, right? It's very real in the sense of the matching principle. We're matching the benefit of the factory, right, with a time period over which it's useful. But it's kind of weird if you're focused on cash because we're showing an expense of $1 million in the P&L when no cash went out.

I'm with you so far. Welcome to accrual accounting and the matching principle, huh?

Yeah, yeah, I know. But this is all the stuff we got to do, Ray, if we want to talk about stock-based comp, because if you don't have the basics down, you're not going to understand it. So let's keep moving forward then. So the main point of all this is simple. If we pay somebody $50K a year in salary, that goes through the P&L every quarter, right? If it's $50K a quarter, make it simple, $200K a year. So $50K a quarter goes through the P&L. That's paid out. For stock-based comp, it's different. We assign some value upfront when we grant this thing, and then we take it over the duration of the grant. And nothing ever happens to the cash account. Right. We're not debiting or crediting cash. Nothing changes. We just gave Ray a piece of paper that says he has the right to buy shares for the next 10 years. Let's say it's a long-tail post-exercise period for $1 a share, and it's going to vest over the next 4 years. No cash.

Now, Dave, when you pay— when you pay me that $50,000 for my salary, that's going to show up on my income statement as an operating expense. Where does this stock-based compensation show up on an income statement or P&L?

So, it shows up as an operating expense because it is an operating expense, right? It's literally compensation expense, which is an operating expense, right? Most, for example, of your R&D line is payroll, right? In some other departments in marketing, it's not all going to be payroll, maybe half payroll, half marketing programs. But for example, for some departments like R&D, R&D is almost exclusively payroll in most companies. And this is just more payroll expense, right? Oh, I'm paying Ray $50K a quarter. Got to put that into the R&D line. Oh, and I gave Ray a grant worth $50K. So every year for the next 4 years, I got to throw in an extra $12.5K to account for that grant. So from a P&L perspective, Ray is costing me, there's $62.5K worth of Ray in my R&D line.

Got it. So it is on the operating expense line item. Okay, got it.

Correct. It is a non-cash operating expense. Which is maybe the part that could blow some people's mind. But in some sense, there's nowhere else to put this, right? If it's the CMO's option grant, it's going to go to the marketing line, which rolls into sales and marketing. If it's the VP of support or the VP of professional services, they typically roll to COGS, right? Support people are COGS, the cost of goods sold, for offering the tech support service. Consultants are COGS for the consulting business. So, it's an operating expense and it goes into the relevant operating line. Actually, I'm confusing myself now because it's not an— it's generally an operating expense. Goddamn it, Ray. Because for support, I was wondering why your face looks so confused because COGS are not operating expenses. I guess the answer is it's an expense and it either goes to COGS if you work in COGS, which is kind of the exception condition, which is why I got trapped. But remember, support staff and PS staff are COGS. Right? They're not OpEx. But if you're in one of the classical functions, R&D, F&A, sales and marketing, it's going to go into OpEx. Did that clear that up or no?

You cleared it up very well. But here's my question to you, Dave. So, because I go right to SaaS metrics, I don't want to take us down that rabbit hole right now either. But since it's not a real cash expense, does that— it could skew my operating efficiency metrics. So, do I have to back that out? And how do companies back that out?

Yeah. So, so look, you said 2 things there. You said it's not a real cash expense, and I'm going to agree with you on the second word and disagree on the first word. It's not a cash expense. Correct. Is it a real expense? Well, this is— now we can get into our kind of accounting philosophy question. And that's the whole thing that begs the question of do you back this out or not? Is it in fact a real expense? So we'll come back to that in a minute. But it's definitely not a cash expense. But if it's flowing into the sales and marketing line, it's going to affect your CAC payback period, right? If it's flowing into COGS, it's going to affect your gross margins, right? And those, which in turn drives, for example, CAC payback period is driven by gross margin. So you're going to find, you're going to find that this will affect your metrics. This is why people often back it out. But what companies will often do is they'll build a P&L that instead of leading to net income, which is the standard GAAP profitability measure, they'll build a P&L where the bottom line says EBITDA, right? And what that means to me, it's a subtle way of saying when you look at the sales and marketing line, you're not going to have non-cash expenses in there, right? That's what it means. So, it means almost— it's a subtle way of signaling. But if that bottom line says net income, I know that all GAAP expenses are where they're supposed to be. So, the CMO's stock option grant is going in under sales and marketing. If it's going to EBITDA, I hope I said that income the first time. If it's going to EBITDA, I know conversely that's not there. So they back these non-cash expenses out from COGS and OpEx to get EBITDA. And then the hilarious part is because some people think SBC should be in EBITDA, they then do adjusted EBITDA, which adds it back in. So confused yet?

Oh no. So, so because I see adjusted EBITDA all the time and often that's where they're adding back in the stock-based compensation expense.

Yeah, there can be other adjustments, but certainly one thing people will add back in is stock-based comp because it's back to that question of, is it a real quote unquote expense? And I'm going to skip ahead here to the Warren Buffett quote, which I love, which everyone loves, which is this. If options aren't a form of compensation, what are they? And if compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, Where in the world should they go? 1992 quote from the Berkshire Hathaway shareholder letter. So, this is an old issue. People have been fighting about this for years. People think it's a trick that Silicon Valley has pulled on Wall Street, right? That we can pretend that stock-based comp isn't an expense. And certainly, all the purists would say, Ray, it may not be cash, but it sure as heck is an expense.

Well, Dave, I have an answer for Warren Buffett.

Yep.

And, and that is that often in private company, stock options are hope and prayer, not income or an expense. But that's a whole different topic.

In theory, that should show up as a relatively low Black-Scholes valuation. So, um, right, if the option pricing formula works right, you're going to have high volatility, and I think that increases the price of an option, but, but I think it should show up in Black-Scholes. So it, which is back to me, it's an expense. We just don't know how much it's worth. That's the problem. And how good is that formula? And that's the part that Warren Buffett doesn't address. So to your point earlier, Ray, people back this out for 2 reasons. One, and nobody talks about the first one, I don't know why, but this is the one that matters to me, that there's legitimate questions about did we get the math right? 'Cause to me, the math seems wrong, comma, very. Like usually accountants are really good at math. And deterministic math. And this math, as discussed, just doesn't work for me. Wait a minute, I granted you something that was worth 10, it's now worth 30, you're selling it the day I gave it to you for 30, and I'm going to flow it through my P&L as if it were worth 10, all because it was worth 10 when I granted it. That just doesn't seem very true to the accounting that I learned. So that's the first reason people back it out, because is it even kind of remotely correct? And the second is, It's non-cash. So if you care about free cash flow, right? And a lot of people think that, you know, enterprise value correlates better to free cash flow than other profitability metrics. Free cash flow is the metric used in the Rule of 40, right? So if you care about free cash flow, then you should not include SBC, right? 'Cause it's a non-cash expense. So any questions there before we continue or comments?

No. So I got this on, it's a non-cash expense.

Yep.

But there's another way that people look at the real cost of SBC, right?

Correct. Which is you can look at it with the other eye and go, wait a minute, maybe the P&L isn't the right place to look at it because we can't figure out how to value it. But so let's just look at the cost of this dilution. Oh, and by the way, there's an argument we're double counting that, wait a minute, like the people who are against expensing options are like, it's already in dilution. You're seeing the share pool get bigger to account for these shares we gave away. It's in the financial statements. It's just not on the P&L. So those people at the time were arguing we're double counting. If we're going to run it through the P&L as expense and we're going to see it anyway in dilution, it's wrong. I don't totally agree with them, but I just want to present the audience with all the arguments. But this is the way I like to look at it because it's easily benchmarked, which is just how much does the option pool get bigger every year at your typical private company? And the answer is roughly 2% to 3%. I think CJ did a study. Well, he picked 25 public companies randomly. And he found a median of 3.6%. But there's this notion that every year you're granting options, so your pool is getting bigger. Sometimes if you average it out over time, your pool is getting bigger every year by between 2% and 3%, maybe between 2% and 4%. And that dilution is the real cost of SBC. Go ahead.

I was just thinking about this because I was just thinking about the timeframe for IPOs. We used to think about 6 to 8 years, but now aren't we looking at like 11 to 13 years? The cost of dilution of stock-based compensation could be a lot higher today than it used to be. Is that— am I thinking about that right?

Well, I think the annual cost is roughly the same, but, but the issue is you got to wait longer now. Um, because when I started in this business, it took 4 years to go public, 4 or 5. I guess you were saying 6 to 8. Now it's like 13 to 15. It takes a very, very long time to go public. And this seemingly modest 3.6% a year average dilution, or even 2%, If you compound it, it gets big fast, right? At 3.6%, 3 years comes 11.2% dilution. If you do it for 13 years, it's 58% dilution, right? So, you're talking about without any fundraising, with zero fundraising dilution, just stock-based comp dilution, that a shareholder over 13 years is going to lose almost two-thirds of their percentage ownership, right? It's going to get cut by almost two-thirds, 58%.

Wow.

So, so this is, this is why CJ calls it the valuation killer. And I think it's a misnomer because you're not actually killing the valuation. You're killing the per-share price because the valuation may be quite healthy, but we're dividing by an increasingly large number of shares.

Well, well, you're killing the valuation as defined by the founder who used to have 50% of the company. Now she or he has 6%. But aren't there some counter tactics and arguments to this, like share buybacks?

Yeah. So if you want to fight dilution, and once again, here's another argument, you can buy back shares. And public companies do this all the time. And the argument is it shows up in cash balance. Once again, it doesn't hit the P&L, right? Because when a company buys their own shares, I'm going to get lost in the accounting, but I know one thing, it does not go through the P&L. It's kind of a balance sheet transaction. You trade cash for treasury stock and that's it. But cash goes down. Right. You'll see it ultimately in cash flow. Cash flow went down. I think it's cash flow investing activities. I'm not sure, but ultimately cash goes down. So the argument against dilution or looking too much at dilution is, hey, we're going to offset that. Don't you worry. You were going to get diluted 3.6% a year, but I'm going to buy a bunch of shares back because we think the shares are undervalued. It's a good use of company capital, so we'll buy them back. Public companies do that. They make that argument. Private companies, by and large, do not. When it may happen, but in my experience, when private companies offer liquidity to employees, right, and they're not buying them from the employees directly, they're not saying, Ray, I'll buy your shares. They're saying, hey, Ray, we found a guy over here, a gal, who wants to buy your shares. So it's a secondary transaction that does not reduce the shareholder count or the share count.

You know, Dave, I have a question for you because I usually can stick with every conversation we're having You know, this is so complicated. There's got to be some type of regulatory policy out there that guides how companies account for stock-based compensation. Is that accurate?

Yeah, correct. I mean, a lot of the debate I'm referring to is old, right? I think it was, uh, 2004. Like, the Warren Buffett quote was 1992. This is an old issue. And I think it was 2004 when they passed FAST 123R, which basically said from now on you're gonna expense options. So the debate kind of ended there. But in another sense, it also began there. So now everybody knew in their GAAP financial statement, you're going to be expensing stock-based comp. It's going to throw— go through the P&L. And as discussed above, that's going to mean 2 things. We have to figure out how much it's worth at grant time, and then we need to take it over some period. But you're done. So in some sense, the GAAP accounting treatment question was asked and answered with FAS 123R, which I think now is known as ASC 718. Same thing. But a new question. It's kind of Pandora's box. A new Pandora's box opened, which is, okay, everyone's going to go back this out of their financials now. So, hey, now that net income has to include this expense, let's stop looking at net income. Let's go look at free cash flow. Let's go look at EBITDA. Let's go look at some non-GAAP financial measure that backs out stock-based compensation.

Welcome Rule of 40, revenue growth plus free cash flow margin.

There we go. Got me to assess history, Dave. This expense is not included, right? When you look at your free cash flow margin, now we all know that stock-based comp is not in there. And here's the big question, Ray. How big an expense is this? We haven't actually talked about that yet. I can't remember whose post this is from. I think it's from Tene's post. He's got some great charts and he picked some companies at random. So I don't think this is a healthy sample. I think it's kind of a handpicked sample. But if we just look at SBC as a percent of revenue, he found the biggest company in his set, Workday, 23% Of revenue was SBC, right? Splunk, they're now private again, but 23% also. DocuSign was 21%. ServiceNow was 18%. Mongo was 18%. Zoom was 11%. Twitter back in the day was 11%, right? So this is not a small number, right? Because, you know, a lot of software companies might only have 10% profit margins. And if you're excluding a 20% expense, well, 10% positive goes to 10% negative.

Yeah.

So, this is not a little thing. Like just what else runs 20% of sales? All F&A expense, right? Often all marketing expense. It is a massive category. Now, it's striped across the P&L, right? So, it's hitting all the different lines as discussed earlier. But this is not a little number at many companies. And I think the median somebody found was around 10. I don't have the chart here handy in the script. But it's the difference between being profitable and unprofitable in Tanay's example. Like Workday, last 12-month operating margins gap, -14%. SBC as percent of revenue, 24%. When you take it out, now we have 10% positive margins. Ditto for Splunk, 12% positive margins before SBC, -11% when you don't back it out, right? Coupa, -18% when it's not backed out, +3% when it is. So, it's not a little deal, right?

Boy, I'm just thinking about how much impact this has on things like the The CAC payback periods I see Jamin Ball sharing via Clouded Judgment or the CAC ratio or the GTM cost ratio that David Spitz does, those, it sounds like they should be calculated after SBC has backed out.

So I think what most people do to calculate, say, a CAC payback period or a CAC ratio is they're going to grab sales and marketing expense off the P&L. And then the question is, what is the P&L doing? And the easiest way to figure out what the P&L is doing is look at the bottom line. And if it's going to operating income, usually it should have the expense in there, but not always. If it's going to EBITDA, most certainly does not have it. If it's building towards EBITDA, then we know all the lines above it are excluding depreciation and amortization. If it's going to free cash flow, usually it's done as a reconciliation off some operating metric. But in any case, you do have to think twice about the P&L you're grabbing the sales expense off, right? And we're a little bit used to this already because sales, you know, we talked about commissions. And the amortization of commissions and should they be included or not in the sales line item. It's the same issue. When you grab that sales expense off the P&L, what exactly are you grabbing? Are commissions in there? Because that's kind of an amortization expense. Not kind of, it is an amortization expense. Is stock-based comp in there? Because it's a non-cash expense. And I would say that most people without even knowing it are including stock-based comp. Most startups, at least at startups.

Interesting.

Nobody puts stock-based comp into the operating lines.

Ah, interesting. I wonder if they're even reporting it at the board level into first— at a Series A or Series B.

Yeah, correct. It's not even anywhere. And the first step in reporting is usually you'll build to an operating margin number and then adjust it after that. You won't stripe— you won't stripe it across sales and marketing, R&D, F&A, COGS. You'll just put one lump at the bottom and say, oh, by the way, if you include SBC, here's what happens to Profitability.

So, well, you know, we typically do a 20-minute episode. We're 27 minutes in. So do you think it makes sense to try to wrap up all the complexity and details we just shared?

Yeah, it does. So apologies to the audience for running long today. Ray and I thought about splitting it in 2 episodes, but we didn't think it was quite enough material to split in 2. And it's proving not to be. So 30 minutes, right, is halfway. It's 1.5 episodes. So in any case, yeah, let's wrap it up. I know why Janelle had to split her post in 2. This is a big complex topic. What have we learned? One, we've learned what stock-based comp is and how to think about it. We've learned how it's expensed for options and RSUs. We didn't get into the detailed formulas, but we basically said the generic formula is figure out a value for it and then take it over time. And that's what we do for both options and RSUs. How do you back it out and why it's backed out to non-GAAP financial metrics like free cash flow and EBITDA?

Yeah.

Like, why do people back it out? How do you back it out? And then we've talked about why it's controversial. And I think there's a couple of reasons. It all comes down to this. Is it a real expense, right? Is it 3 things? Is it real? I think yes. Some people think no. Is it cash? Everybody goes, no, it's not cash. Is it an expense? I think yes. Back to the real thing. But the problem is it's just really hard to nail down. The real problem, in my opinion, is it's very hard to figure out what it's worth until it actually happens. Until you exercise the option or vest the RSU, I don't know how much money I gave you. And the accountants, in my opinion, incorrectly decided that they'd take a best guess upfront rather than try and do it on the back end. And I think that brings— I mean, that's why we're here talking about it, because it makes the whole thing debatable. But we do know one other thing, Ray, that we've established. It's big. It's, you know, in the range, maybe 10% of sales, 20% of sales. This is not a minor expense. So, figuring out, and to your point, this does impact your SaaS metrics. You may not have even thought about it, but it's potentially impacting your SaaS metrics even though you never thought about it because you never asked what's in sales and marketing anyway.

Well, CAC, thank you for the detailed insights into stock-based compensation and hope our audience enjoys it as much as I did. I learned a lot. Thank you, Dave.

Thanks. The Metrics Brothers AI, SaaS, and More is a production of The Metrics Brothers Growth and CAC. And a member of the Benchmarket Podcast Network. By accessing this podcast, you acknowledge that the Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told.

Ahem.

Ray? Information, opinions, and recommendations presented are, according to our spouses, probably wrong and provided for information purposes only. This podcast should not be considered professional or, for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, undirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of, or God help you, reliance upon the information presented here. Ray Grothreich is based in New York City and available on X at Ray Reich. Dave Kellogg is based in Silicon Valley and available on X at Kellogg. Schedectity, which is French for unspellable, is not our actual production location. Thanks for listening.