The accounting behind stock-based compensation can distort the real financials of a company, making it critical for investors to be aware of the short-term costs associated with it. The debt of a company is always senior to equity, so investors should aim to protect capital by owning debt instead.
The stock-based compensation in Silicon Valley is not tied to performance which leads to distorted numbers and short-term costs. Companies like Manscaped face significant net loss in 2021 with their excessive use of stock-based comp.
Peloton and Buzzfeed are among the public companies facing financial troubles as they struggle to maintain cash flow while experiencing significant losses in revenue.
The most interesting tech companies to invest in are the few that will survive the downturn, but make sure to protect yourself by owning the debt in the capital structure as it is always superior to the equity. Founders must understand that a downturn is coming and start reducing their burn.