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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is managing partner at Thoma Bravo
Companies have a responsibility to try to protect every share from value erosion arising from the equity dilution when new stock is issued. But many companies are issuing shares too freely as stock-based pay, and the problem is coming to a head in the age of AI.
The cost of excessive stock-based pay may not be immediately obvious to investors as the expense can be reported below “adjusted” profit figures and is amortised over a period of years. As valuation expert Aswath Damodaran warned in an FT column in 2019 on the issue, the two words that you should dread the most in a financial statement as an investor are “adjusted earnings”.
Market volatility exacerbates the problem. In particular, when a company’s stock falls, it often issues larger grants of so-called “restricted stock units” (RSUs) that vest over several years to keep employees’ pay packages whole. Firms can blunt the dilution by buying back shares, as many have, though the true cost remains. Investors rarely understand the full bill.
Stock-comp accounting has been contested for decades. In 2004, the Financial Accounting Standards Board closed a loophole that let companies leave stock options off their expense statements. However, this simply redirected firms to swap options for RSUs, which employees prefer because they retain value even when a stock falls below the option strike price. Tech firms competing for scarce and expensive talent have particularly favoured this approach.
The effect of greater stock-comp shows up in the widening difference between profit figures under GAAP standards and the “adjusted” ones most analysts use for valuation. Call it the “GAAP gap”, which has roughly tripled since 2020 across the 17 largest US-listed software firms from a median gap of minus 14 per cent in 2020 to minus 44 per cent in 2025. Stock-comp has been the dominant cause.
Even the most cash-rich companies aren’t exempt. It was telling that when Alphabet recently announced its first equity raising in decades, it set aside a large slice of the nearly $85bn raised to issue fresh shares so employees could keep more of their vesting stock rather than selling a chunk to cover the taxes due. Settling tax bills for employees in that manner is rare for a mature company and is usually tied to an IPO vesting cliff (the point at which a large number of RSUs free up at the same time).
Three forces are expected to now make the overall stock-comp maths worse. The first is the cost of AI infrastructure. Hyperscalers are expected to spend $725bn on it in 2026, up 77 per cent from 2025. Every dollar of that spending is a dollar not available for share buybacks that have neutralised, or masked, stock-comp dilution at the biggest firms.
Second, companies that saw their market values slashed by AI-driven repricing have already issued more stock to retain employees, in particular software companies. Share buybacks have been holding dilution in check but this might not be sustainable. This in turn raises a question: What happens to those businesses if they have to pay a meaningfully larger share of compensation in cash?
The third, and least discussed, is the rise of the AI “acqui-hire” — de facto takeovers booked as compensation largely in stock. The target firm is left standing as a corporate shell while the acquirer hires away its key people and pays retention grants vesting over several years.
Unlike a conventional acquisition where the purchase price is a one-time cost in some combination of cash, debt, equity, the acqui-hire’s tab stays open: when the grants vest and then expire, the acquirer presumably will re-up with more RSUs or risk losing the talent. That rolling obligation flows through the income statement.
When investors evaluate stocks, it seems that many commonly ignore stock compensation and focus on adjusted earnings or free cash flow. I’ve watched this from the inside of deals. We’ve seen this in our own deals: in one recent acquisition, a large investor initially built its view of intrinsic value using a discounted cash flow analysis that ignored stock-comp. When they put it back in, the picture changed materially, which we believe made it clear to the board and shareholders that our offer was fair.
Companies can better protect shareholders by treating stock-based compensation transparently as the operating expense that it is — and ditch the creative accounting that masks the cost. Markets would be healthier for it.
