Thoughts on Stock Comp in SaaS

Blog post, Sleeper Thoughts. The live URL now 404s; recovered from a February 2026 Wayback snapshot.

Key Takeaways

• The frame is a personal loss. The author, investing a college fund at sixteen in 2008, doubled down on a Greek dry-bulk shipper down 80% — and learned that the stock kept falling because the company was issuing shares. “The simple mental model which equates market cap with share price level returns doesn’t work if the share count increases dramatically along the way.”
• The four-part consensus he says SaaS investors settled into: (1) SBC is a real expense; (2) the equity-participation and retention effect of vesting is genuinely good; (3) given prevailing valuations it is not a major drag and is best accounted for as dilution; (4) there is a “triangular social contract” between companies, shareholders and employees in which this compensation is more variable than cash and correlated with good times.
• His claim: 1 and 2 still hold, 3 and 4 broke.
• The arithmetic that breaks #3. A $100m-ARR company growing 30%, with SBC at ~20% of revenue. At 15x ARR ($1.5bn), that $20m of SBC is ~1.3% of market cap per year — tolerable. At 3x ARR, the same policy means issuing shares worth ~7% of the company every year, turning a ~14% IRR into ~7% post-dilution, against corporate bond yields in the high single digits.
• What breaks #4 is a choice, not the market. As valuations fell, many firms “refreshed” grants to hold employees’ dollar compensation constant — which converts SBC from variable upside participation into a cash substitute, and quietly moves the risk onto existing shareholders.
• The distinctive point: unlike a distressed shipper forced to issue equity to survive, most SaaS companies have strong balance sheets. They are “effectively issuing dilutive equity at its own discretion,” using shares management believes are undervalued.
• Two proposed fixes: commit to buying back shares issued to employees so dilution is capped at a stated percentage (converting excess SBC into a quantifiable cash expense), or shift the mix toward more cash plus out-of-the-money options on the usual vesting schedule — which restores the original “participate in the upside” intent.
• He is careful not to allege bad faith: he reads it as founder long-termism plus inertia, in a paradigm that has been the Valley norm since these companies were founded.

Connections

• The source behind Stock-Based Compensation, created 2026-09-01 to give this material a home.
• The dilution-versus-market-cap lesson is the same arithmetic Riches in Niches and The Art of Capital Concentration run from the fund side: ownership retention, not headline value, is what decides the return.
• Bears on SaaS Metrics and the “structurally unprofitable SaaS” argument — the piece names that critique directly and says unserious SBC treatment is what drives it.