Startups have to pay back all that equity compensation someday

This earnings season has not been kind to all companies. While there have been some notable wins, including well-received results from Uber and Amazon, other major tech companies fared poorly in the wake of their second-quarter financial reports.

However, two companies that posted results that were disfavored by investors, Airbnb and Snap, are interesting for reasons apart from their negative share-price movements in the wake of their earnings reports despite divergent results. What makes the two companies stand out this earnings season is they both announced plans to spend heavily to buy back their own stock, a form of shareholder return that we don’t tend to see from tech companies until they are older and have a longer history as public entities.

The Exchange explores startups, markets and money.

Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.

The use of cash in high-growth companies has a virtue-signaling component. Companies that use cash for shareholder return over, say, growing faster are telling investors that they cannot deploy all their cash flow into efficient growth opportunities. This can mark a turning point wherein a company generates shareholder return not merely in the form of share-price appreciation built off of rapid top-line expansion, but with a mix of growth and direct investments in shareholder value. Buying back stock limits a company’s total float, or equity base, making each individual share of stock worth more, something that investors appreciate.

This article was originally published on Read More on their website.

Leave a Comment