Warren Buffett Would Never Ignore This Silent Wealth Destroyer

Most investors overlook this one metric. Buffett wouldn’t. And neither should you.

I’ve been investing since 2014. I’ve gotten increasingly better at analyzing 10-K reports. However, until recently I ignored one silent killer hiding in plain sight: share-based compensation (SBC).

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What Is Share-Based Compensation (SBC)?

It’s when companies pay employees or executives with stock instead of cash—typically in the form of stock options or restricted stock units (RSUs).

On the surface, it sounds like a win-win since it means employees have skin in the game.

But there’s a hidden cost: dilution.

Every time new shares are issued to employees, existing shareholders own a smaller percentage of the company. Over time, that compounds—often without investors realizing how much ownership they’re giving up.

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🧠 Why It Matters: Think Like an Owner

Warren Buffett has praised Apple’s buybacks not just for returning capital—but because they increase Berkshire’s ownership stake without spending a dime. As he wrote in his 2022 letter:

👉 Key insight: If buybacks grow your share of the pie, excessive SBC quietly shrinks it. Even if the business performs well, you’re left owning less of a more valuable asset.

When SBC becomes habitual—disguised as “non-cash”—you’re not just footing the bill. You’re giving away future upside.

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📊 A Simple Ratio With Big Implications

SBC as a % of revenue strips away the narrative. It tells you, dollar for dollar, how much value is flowing to insiders.

• 5%+ of revenue in SBC? That’s a red flag.

• 10%+? Now you’re in speculative territory.

• Under 2%? That’s what you want to see in a shareholder-aligned business.

Excessive SBC often signals:

• 🚩 Poor capital discipline

• 🚩 Aggressive stock issuance (to mask dilution)

• 🚩 Misaligned incentives (growth at any cost)

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🧮 Inversion Time: What If SBC Were Paid in Cash?

Invert the situation: If a company paid employees $500M in bonuses every year—in cash—would you still call it profitable?

Stock-based pay is pay. If it’s recurring, it’s part of the cost structure. Period.

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💡 What To Do With This Info

• Always track SBC as a % of revenue over time—not just in a single quarter.

• Compare across peers. High-growth SaaS? Still no excuse for 20% dilution.

• Adjust your valuation models. Use diluted share counts, not management’s wishful metrics.

If you wouldn’t accept 10% dilution of your portfolio every year, why accept it from the businesses you own?

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🚫 Don’t Let GAAP Fog the Truth

GAAP lets companies exclude SBC from adjusted earnings. You shouldn’t.

Every share granted chips away at your claim on future profits. The market may ignore that today—but rational investors shouldn’t.

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I hope this was helpful to you.

Sincerely,
Chris Franco (follow me on X)

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