Tuesday, August 23, 2022

Coinbase And Robinhood Are Massively Diluting Investors By Issuing

Coinbase And Robinhood Are Massively Diluting Investors By Issuing


  • Declining stock prices forced companies to issue more restricted stock units.
  • Companies like Robinhood and Coinbase are issuing more shares to match previous compensation packages.
  • A JPMorgan report notes that issuing more shares dilutes value for existing shareholders.
  • Companies like Robinhood and Coinbase have relied heavily on issuing shares to attract new hires after the stock market crash sent their stock prices down — but analysts at JPMorgan say the move could have a negative impact on the company's existing shareholders.

    To follow the employee compensation package and to match the previous package, the company will issue additional shares. This practice will significantly reduce the value of existing shareholders once the shares are acquired, and the dilution could continue for years to come, JPMorgan analysts Kenneth Worthington and Michael Chu said in a July report.

    Analysts Robinhood and Coinbase could solve this problem by cutting compensation or paying more, but either approach warned the company that it could cause other problems, such as a loss of talent or a reduction in the company's cash flow.

    Companies often issue certain stock units, or RSUs, as employee compensation. When RSUs are granted to employees, they represent the largest share of their total compensation, and companies allocate RSUs based on the value of their stock on the day the package is issued, so companies issue higher RSUs as their stock gains value. It falls to match the previous compensation package.

    According to JPMorgan analysts, Coinbase is issuing 6.4 million shares worth $1.5 billion in 2021, while Robinhood is issuing 33 million shares worth $1.3 billion to its employees. Analysts estimate RSU Coinbase and Robinhood are losing shareholders 10-15% annually based on current RSU rates issued and issued, as well as falling stock prices. Even with price adjustments, they estimate that inflation will be around 7% per year.

    Worthington and Cho estimate that stock-based compensation accounts for 35-50% of both companies' compensation schemes. Although analysts expect both companies to eventually reduce the number of RSUs they give to employees, they maintain RSUs as a major form of employee compensation.

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