Tracking the Evolution of SBC — A Multi-Year Lens
At its core, SBC is about ownership — and ownership sits at the heart of our investment philosophy. When implemented with discipline, SBC is a powerful tool to align incentives, drive accountability, and share in long-term value creation. We believe the best outcomes happen when people think and act like long-term owners, and SBC remains one of the most effective ways to foster that mindset. We’ve written here about what ownership means to us.
But while SBC can foster alignment, it is not supposed to be free money. Every share granted is a slice of the pie — and when issuance runs ahead of value creation, it comes at a cost to existing shareholders. What begins as a tool for alignment can quickly become a source of unintended dilution if not tightly governed.
That philosophy has guided our multi-year exploration of SBC. In previous updates, we tracked how changing market dynamics, investor sentiment, and company behaviour have shaped the arc of equity compensation — from excess to (partial) course correction. A quick recap of our work in previous years:
2022: The Valuation Reckoning
In Stock-Based Compensation for Fast-Growing Technology Businesses: The Headache Caused by Lower Stock Prices, we explored the fallout of falling share prices and the knock-on effects of bloated equity comp plans. Dilution surged, morale suffered, and investors began to take notice.
2023: A Sharper, Data-Driven View
Stock-Based Compensation in Public Growth Technology Companies: A Fresh Look at the Data expanded our analysis through broader benchmarking. While discipline was emerging in pockets, many companies continued to rely on outdated structures and lacked a clear SBC philosophy.
2024: Early Signs of Discipline, But Not Yet a Revolution
Stock-Based Compensation Dilution Benchmarking: 2024 Update showed encouraging trends: SBC as a percentage of revenue declined, buybacks became more common, and net dilution fell modestly. But improvements were uneven, and many companies still defaulted to equity-heavy playbooks.
2025: Where We Are Now?
We have refreshed our analysis of 114 companies using 10-K filings and company buyback disclosures and the picture is clearer: companies are getting more serious about managing dilution. In this latest update, we look at who’s leading, who’s lagging, and how the conversation around equity programs is evolving — from dilution mitigation to reimagining compensation structures entirely.
Following the same approach as last year, we’ve averaged results across 2023 and 2024 to smooth out one-off impacts and better reflect underlying trends in dilution.
The Data Updated: Pre-Buyback Dilution
The statistical breakdown of average net SBC-dilution (across 2023 and 2024):
- Top Quartile: <1.5% annual dilution
- Median: 2.3% annual dilution
- Bottom Quartile: >3.2% annual dilution
Across all companies, average net dilution fell from 2.8% (2023) to 2.4% (2024). This improvement reflects both higher stock prices and more disciplined equity issuance.
Robinhood sits atop of our analysis of net SBC-based dilution over the past two years — and is the only company in the dataset to report net negative dilution (before buybacks), averaging (1.5%). Rather than simply offset new equity issuance, Robinhood has reduced its fully diluted share count, a rare outcome in the sector.
At its December 2024 Analyst Day, management acknowledged that SBC levels had been elevated around the time of the IPO and outlined the steps they’ve taken since:
“Our SBC was too high around the time of our IPO, but we’ve managed that down substantially… to 13% of revenues, and I think we can get this even lower, in the zone of like 10%.1”
They also reaffirmed a capital allocation strategy focused on per-share outcomes:
“What’s really important to shareholders is increasing profitability per share… And when we allocate capital, our #1 priority is to maximize earnings and free cash flow per share.2”
While many companies continue to view dilution as a necessary trade-off for growth, Robinhood’s approach reflects a clear intent to manage share count proactively and align compensation practices with long-term shareholder value.
Another company we follow closely, Klaviyo, also piqued our interest on their recent earnings call announcing a restructuring of its remuneration strategy, as outlined by CFO Amanda Whalen3:
“We have, particularly in the last couple of quarters, shifted the structure of our go-forward compensation programs – more cash and less equity – and we think that helps us from a dilution standpoint.”
There is no doubt the tide has shifted, controlling dilution is squarely on the agenda of growth technology companies.
Post-Buyback Dilution
We have again included post-buyback dilution data in this year’s analysis, given continued interest from readers and the rising number of companies executing share repurchase programs — 61 companies in 2024 versus 56 in 2023.
That said, our view remains unchanged from last year. While buybacks can play a useful role in capital allocation, we believe they should be assessed independently from SBC. The decision to repurchase shares should be grounded in valuation and return-on-capital considerations, not as a mechanical offset to dilution. As we wrote last year:
“A company’s decision to perform buybacks should be made independent of offsetting SBC-based dilution. In other words, they shouldn’t have anything to do with each other.”
This philosophy continues to inform why our primary benchmarking focuses on pre-buyback dilution, as the cleanest indicator of underlying issuance discipline. Still, we’ve provided post-buyback figures again for completeness, and to highlight where repurchase strategies are materially affecting outcomes, such as those from Twilio, Chegg, and Dropbox.
Beyond RSUs: Rethinking What Talent Really Values
SBC is often justified on the grounds of alignment — the idea that giving employees equity will make them think and act like owners. But that only works if employees actually value the equity in the first place.
In practice, that’s not always the case. In a detailed study from Counterpoint Global’s Michael Mauboussin — one of the most respected voices on investor behaviour and valuation — the authors observe that “the research generally concludes that employees are not great at valuing the equity in their compensation.” Factors like risk aversion, illiquidity, and limited financial literacy all contribute to this disconnect. And when equity is misunderstood or undervalued, its power as an incentive weakens — making the dilution cost to shareholders harder to justify.
A quick side bar on this specifically:
We spend an inordinate amount of time with portfolio companies — management teams and employees alike – to educate them on the value of their equity. It has always surprised us how poorly even highly incentivised executives understand the value they will accrue if they execute to a high degree. We believe it is imperative for companies to be able to articulate the value of their equity plans clearly and succinctly, otherwise it can erode trust amongst the employee base. We would recommend education to happen at regular intervals, as well as the equity program to be clearly explained and valued in employee onboarding. To do this, executives and managers need to be armed with the facts. For example, the table below is a snippet from a 2016 presentation TDM gave to a private company management team. Its intent was to clearly outline how they would share in the value creation via the company’s Long-term Incentive Program (LTI) at various levels of Total Shareholder Return (TSR).
Shopify offers a compelling middle ground. In 2022, it introduced Flex Comp: a model that lets employees choose how they want their total package split across salary, RSUs, and Options. The logic is simple — employees are best placed to know what they value most. One may prioritise near-term cash; another may want more equity exposure. Flex Comp respects those preferences and improves transparency around the true value of compensation.
As Shopify put it:
“We’ve rewritten the story of compensation… Flex Comp gives employees agency and clarity. It helps ensure our equity is truly valued — not just issued.”
Notably, Shopify still recognizes the importance of ownership. To reinforce that value, the company offers a 5% bonus on any additional equity employees choose beyond their default RSU/option mix — a signal of support for those who “want to take more risk to support the mission.”
Shopify were certainly not the first to try this – the “Spotify Incentive Mix”, launched in 2019, again prioritises employee agency, enabling them to choose their incentive compensation to be taken as up to two of the following four options in increments of 25%:
- Cash
- Restricted Stock Units (RSUs)
- At-the-money Options (ATM ESO) x 4
- Out-of-the-money Options (OTM ESO) x 8
Both companies should be commended on redesigning their compensation from first principles, managing the tricky tightrope of aligning all shareholder interests and the diverse risk appetite for an ever-growing employee base. It should be noted that any Spotify employees who took 100% OTM options would have done particularly well given the 8x increase in share price in the last 3 years!
Bringing It All Together
Stock-based compensation was supposed to align everyone — employees, shareholders, founders. And in theory, it does. But in practice, alignment depends on understanding, discipline, and trust — and that’s where the gaps show up.
Over the past few years, those gaps have narrowed. Dilution is coming down. More companies are asking harder questions about their equity programs. A few like Shopify are even rewriting the rules entirely. Progress is encouraging, but discipline, alignment, and clarity still have a long way to go.
Many companies are still handing out equity by habit, not strategy. Plenty are buying back stock without a clear sense of value. And others are giving employees ownership without properly explaining what it’s worth — or why it matters.
That’s the direction we’re watching. Because the goal isn’t just to give away less. It’s to build something worth owning — and to make sure everyone knows what they own.
Footnotes
