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Memo to software executives: Now is the time to radically reduce the amount of stock you give employees. That would win you some favor with investors, who’ve generally gone off your sector thanks to worries about the threat posed by AI. Even if those concerns are overblown, cutting costs in the face of a major disruption is a smart idea.
It’s no secret that software companies overdo stock compensation compared with companies in other industries. KeyBanc analyst Jackson Ader estimated in a report last month that software companies included in the Russell 1000 stock index had a median stock compensation expense of 13.8% in 2024, whereas for all companies in the index, the median was 1.1%. And 13.8% isn’t particularly high for software: a few software firms report stock comp that’s well above 20% of revenue. A good example is Snowflake.
The data analytics software firm reported stock compensation that was an astounding 41% of revenue in fiscal 2025, a tad lower than in the previous year. A year ago, then–Chief Financial Officer Mike Scarpelli forecast stock compensation would decline as a percentage of revenue in fiscal 2026, which ended Jan. 31, thanks in part to “a more thoughtful approach to hiring.” And it did fall—to a still-high 34%.
Snowflake’s new CFO Brian Robins said in a statement on Friday the high stock comp “reflects investments made during a period of exponential growth to establish Snowflake as the category-defining company we are today.” He noted that Snowflake is aiming to lower stock comp to 27% this fiscal year. That’s still a lot!
The reason this is such a sensitive issue is that while stock compensation expense is recorded as a noncash cost, it does end up draining cash. Companies typically buy back stock to ensure the shares they’re handing out to employees don’t dilute the share count so much that regular shareholders end up impoverished. Snowflake, for instance, spent 78% of its free cash flow last year on share repurchases. In other words, high stock compensation means software firms don’t have as much freely available cash as you might think.
The spotlight on the sector right now suggests investors are paying more attention to this. KeyBanc’s Ader seems to think so. His report from February was one of four he published over the past two months on stock compensation in the software sector. He points out that average stock compensation rocketed as a percentage of free cash flow between 2020 and 2022. And while it has come down a bit since then, his analysis shows it’s still much higher than it was before 2020. Ader suggested that the value of new equity grants has also started to come down.
Certainly, some companies are trying to cut their stock compensation. ServiceNow, for instance, which reported stock comp at 14.7% last year, down from 17.9% in 2023, wants to get that expense below 10% in the long term, according to a ServiceNow spokesperson. More companies need to follow suit.
Musk’s Twitter Legacy
Elon Musk’s transformation of Twitter into X has been so complete that it is easy to forget that Musk didn’t actually want to buy the company. As a court ruling on Friday reminded us, Musk had tried to get out of the deal—and only completed it after Twitter sued him.
Remember, Musk had impulsively agreed to buy Twitter in April of 2022, paying what would prove to be a top-of-the-market price of $44 billion. At the time, rising interest rates were slashing stock prices. In July of that year, Musk tried to back out of the deal, but Twitter’s board quickly sued to enforce the agreement. Twitter directors surely knew they’d never get a price that high again. Faced with a likely loss in court, Musk agreed to close.
He later admitted he was overpaying. If Musk had made his original offer six months later than he did, he likely would have been able to pay half the price!
His change of heart is proving costly in more ways than one. A jury on Friday found Musk was liable for losses suffered by shareholders who sued after he tried to end the deal. Lawyers for the shareholders claimed damages could total $2.6 billion, according to a CNBC report on Friday. That’s small change for Musk but it adds to the cost of the deal.
In Other News
• The U.S. Justice Department has charged three Super Micro Computer employees with illegally shipping at least $2.5 billion worth of advanced AI servers to China, violating U.S. export controls. U.S. officials didn’t name the specific chips involved, though Nvidia commands a dominant share of the AI chip market.
• The Trump administration on Friday released a framework detailing its policy approach to the AI industry, calling on Congress to pass federal laws for AI regulation that would override state legislation. A “patchwork of conflicting state laws would undermine American innovation and our ability to lead in the global AI race,” the White House said.
• Jeff Bezos’ space firm, Blue Origin, asked the U.S. government for permission to launch up to 51,600 satellites that would one day handle AI computing from orbit.
• Amazon is working on a smartphone that incorporates AI capabilities, more than a decade after the e-commerce giant tried and failed to crack the market with its Fire Phone, Reuters reported on Friday.
• Anthropic filed a brief on Friday showing how close the Department of Defense was to reaching an agreement with it about using its artificial intelligence even after Defense Secretary Pete Hegseth Feb. 27 said he would direct the agency to declare the company a supply chain risk. More here.
• OpenAI expects to increase its headcount to around 8,000 employees by year end, up from about 4,500 employees.
• Elon Musk announced that his planned chip manufacturing facility will be built in Austin, Texas, and run jointly by Tesla and SpaceX, Bloomberg reported.
Friday on The Information’s TITV
Check out today’s episode of TITV in which we speak with our Microsoft reporter about his in-depth profile on the new CEO of the company’s gaming business.
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