Please tell me that you see this.
Yes Saul, in the scenario that you outlined, the company has banked $1M in cash as a result of its operations, and if you ignore what is going on with the ownership of the company then you could regard that as a $1m profit made by the ‘abstract’ company.
And there’s absolutely nothing wrong with thinking about it like this, if that’s what makes most sense to you.
I like to think about it in a different way.
Let’s imagine that the CEO got paid his $1m in cash, and then the company went out to raise the cash by selling $1m of shares.
The CEO decides he’d like some shares and takes the whole $1M paying for them in cash.
The end result is the same.
The $1M is in the bank, the CEO has his shares, and the overall share count is the same.
But in the second scenario the reported profit is zero. But to all intents and purposes the transactions are equivalent to the first scenario. The only difference is where you put the accounting entries.
That is why I like to think about stock based compensation as an expense.
But that’s just my preference.
I think the most important thing is that when you read the reports it doesn’t matter whether you start with GAAP and look at the adjustments or look at non-GAAP and see how it reconciles back to GAAP.
As long as we make sure that we know what the adjustments are and why management thinks that making those adjustments are a good idea.
It’s easy to get tied up in semantics, but it doesn’t really get us anywhere. If we are taking a hit as shareholders, does it really matter whether we are getting hit by dilution or getting hit by a wage expense? The hit is just as painful either way.
We may be taking two different roads, but I think we will both end up in the same place.