Without wanting to restart the SBC wars again (hell, please no), I still feel I need to say this as I have thought quite a bit about SeltinelOne’s SBC and my (I now believe flawed) attempt at comparing SBC between our companies in my January portfolio review.
I now believe that comparing SBC expense between the companies we follow is currently meaningless. Imo dilution is really the only way to compare companies meaningfully wrt SBC.
The reason for that is that when comparing companies like ours, we need to take into account the environment in which they listed, we need to really understand exactly what each company did and what assumptions went into valuing each issue of SBC. And I don’t think that’s time well spent. At least not for me, so I think ignoring SBC expense and focusing on dilution is the way to go.
On to SentinelOne’s SBC as an example: most of the current years’ elevated SBC expense is due to incentives (RSUs/Options) that were issued to employees in 2021 and more precisely in the latter half of 2021 as they IPO’d in June.
Now as you’ll recall SentinelOne’s and many other co’s on this board’s share price peaked somewhere end 2021.
They valued a lot of share incentives at extremely high values back then. But they are expensing those now, of course without reducing the value of the incentive being expensed (because you’re not allowed to under GAAP rules).
Here’s the note for RSUs - which were valued using $57 per share end 2021
As of January 31, 2022, we had unrecognized stock-based compensation expense related to unvested RSUs of $77.0 million that is expected to be recognized on a straight-line basis over a weighted-average period of 3.7 years.
And for unvested options:
As of January 31, 2022, we had unrecognized stock-based compensation expense related to unvested options of $148.6 million that is expected to be recognized on a straight-line basis over a weighted-average period of 2.8 years.
And milestone options:
As of January 31, 2022, we had unrecognized stock-based compensation expense related to unvested milestone options of $16.3 million, that is expected to be recognized over the remaining implied service period of 4.6 years.
Now bear in mind that those options were valued using assumptions that would make us all blush at this point in time. The big inputs that are different to now are the stock price (much higher back then than today → options valued higher back then) and interest rates /risk-free rates (much lower than today → options valued higher). They tell us they used a range of 0.8% - 1.1% for the risk free rate!!
If those same currently unvested incentives were valued now, they would be valued far, far lower than the values that SentinelOne has to expense
The problem is that, because of this, comparing SBC between companies is not useful in the case where the assumptions used to value stuff that hasn’t actually yet vested moved by as much during the vesting period as it has in the last year.
Have a look at page 106 of the annual report for the details.
-WSM