Mar 21, 2024 · 1h 26m · bg2-pod
Ep5. Stock Comp, AI Cold War, Valuations for LLM | BG2 with Bill Gurley, Brad Gerstner, & Bob Mylod · Bg2 Pod
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In Episode 5 of the BG2 Podcast, co-hosts Brad Gerstner and Bill Gurley, along with guest Bob Mylod, analyze the mechanics and governance pitfalls of Stock-Based Compensation before evaluating major technology developments, including Apple-Google AI rumors, TikTok legislation, and LLM market valuations.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Brad and Bill hold 74.1% of the talking time here. How this is scored →
Brad and Bill as informed peer 7.9 Guest teaching 3.1 Guest disagreement 1.1 Brad and Bill pushing back 2.1
speaking balance: gold is Brad and Bill, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 21:00 Mylod rejects percentage dilution framing in favor of hard cash dollars
Mylod forcefully dismisses the conventional boardroom focus on dilution percentages, arguing that dilution percentages do not appear on W-2s and obscure true compensation costs.
Hardest push from Brad and Bill ▶ 13:57 Gurley challenges the notion that stock options lack intrinsic valueGurley directly interrupts the framing that strike-price options have no value by citing how synthetic option creation in Black-Scholes proves at-the-money options trade with real value.
Biggest teaching moment ▶ 11:15 Mylod explains how FAS 123 drove companies toward RSUs and pro-forma distortionsMylod provides a first-hand historical account from the dot-com crash of how accounting mandates forced public CFOs to abandon options and begin pro-forming out equity costs.
Brad and Bill hold their own ▶ 1:19:32 Gerstner reframes generative AI revenues from ARR to ERRGerstner demonstrates proprietary market expertise by banning the term ARR for LLM business models and coining ERR to reflect zero switching costs and low revenue durability.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Brad and Bill as informed peer | Guest teaching | Guest disagreement | Brad and Bill pushing back | Why |
|---|---|---|---|---|---|---|
| The Historical Context and Evolution of Stock-Based Compensation | 8 | 2 | 1 | 1 | Bill Gurley provides deep historical framing on Silicon Valley stock options, the 1999 dot-com fallout, ISS governance, and the mathematical transition to RSUs under Black-Scholes models. | |
| Priceline's Dot-Com Collapse, FAS 123, and the Accounting Shift to RSUs | 7 | 7 | 2 | 3 | Bob Mylod educates the hosts on the unintended consequences of FAS 123 and Sarbanes-Oxley during Priceline's restructuring, while Gurley pushes back to clarify that at-the-money options do hold traded market value. | |
| Pro-Forma Earnings Manipulation and the AI Compensation Arms Race | 8 | 6 | 3 | 2 | Mylod exposes how tech companies treat SBC as zero-cost in pro-forma earnings while inflating engineering compensation, contrasting this with Booking's share count reduction strategy. | |
| Evaluating SBC Metrics, Board Governance, and Market Standards | 8 | 6 | 2 | 2 | Gurley and Gerstner dissect the upward ratcheting effect of comp consultants and peer benchmarking, while Mylod demonstrates how annual dilution compounds against real free cash flow. | |
| Startup Equity Practices, Compensation Rules, and Guest Wrap-Up | 7 | 4 | 1 | 1 | The discussion turns to startup compensation rules from Series A to late stage, citing Gary Steele's dramatic reduction of equity participation at Splunk. | |
| BG² Podcast Interlude Graphic Bumper | 8 | 0 | 0 | 2 | Gerstner and Gurley analyze rumors of Apple partnering with Google Gemini, arguing Apple will maintain its own SLM for personal assistant functionality on handset devices. | |
| The TikTok US Ban Legislation and the US-China AI Cold War | 8 | 0 | 0 | 4 | Gerstner and Gurley debate the TikTok divestiture bill and sovereign AI dynamics; Gurley challenges ByteDance's data assurances and points out structural asymmetry in China market access. | |
| Microsoft's Inflection AI Deal, LLM Switching Costs, and ERR vs. ARR | 9 | 0 | 0 | 2 | The hosts analyze Microsoft's Inflection deal as a yellow flag for AI valuations, introducing the concept of Experimental Run Rate (ERR) vs. ARR and arguing that LLM switching costs approach zero. |
Statements from this episode (22)
Gerstner: Computers are not far off from surpassing all human intelligence
“We're going from this era where computers were highly efficient calculators, and I said, you know, we're not far off from it being, computers being able to reason and think, and being smarter than every human who's ever lived on the planet”
Gurley: Startup option dilution drops from ~10% early on to ~3% near IPO
“When a startup would get started in early years, you might have as much as, say, 10% dilution from options. You might hire three executives during that year, and it's a big grant, but then as you move towards being public, people would typically, and these are…”
Gurley: Black-Scholes values one RSU at roughly 2.5 to 3 options
“There's an argument from Black Shoals that a single RSU is worth about two and a half or three options. So if you could switch From these options to an RSU, this investor thought dilution might drop from, say, four percent to 1.2% or something like that, and t…”
Gurley: RSUs misalign management by preserving equity value during stock drops
“Here's where we get into questions of alignment with shareholders, because you could theoretically have a management team that leads a company, you know, over a year to a 20% decline and pick up 80% of the value of their equity award. Whereas shareholders are …”
Mylod: Ignoring stock compensation caused 15 years of runaway tech pay
“And for a tech company, oftentimes stock-based compensation happens to be the single largest expense component of a tech company.
And yet somehow inexplicably, even though it's the largest single expense component of that company it is not considered to be eve…”
Gerstner: Pro-forming out equity compensation leads to severe resource misallocation
“When you don't, when you proforma something out, right, when you stop treating it like cash, right, it leads to a misallocation of resources because you're effectively saying this doesn't exist, and when you know, what happens when the cost of something disapp…”
Gurley: Microsoft's $11 billion annual SBC is only 0.35% dilution
“Microsoft's SBC is 2.8 billion a
quarter.
So that's over eleven billion a year.
And this morning we woke up and read about them taking some employees from a hot AI company in the valley.
And when you're handing out eleven billion a year in RSUs, you know, you'…”
Gerstner: Only 10 of 50 tech companies keep SBC under 20% FCF
“On a chart of maybe 40 or 50 names, we have maybe 10 names that are under 20% of their free cash flow as a percentage of stock-based compensation.”
Gurley: Netflix offers zero RSUs, letting employees choose options or cash
“Netflix today has a remarkably unique compensation structure. No one does anything like them. But today, if you're an employee, you get to choose either options or cash, and there's a slider, and you get to pick where you want to be on that slider. They don't …”
Gurley: No tech CEO I work with would accept Elon Musk's pay package
“I would offer any CEO I work with the Elon package, and I'm certain none of them would take it.”
Mylod: Sinking 35% of free cash flow into SBC destroys company value
“If you dilute free cash flow by 30 to 35% every single year for 20 years, guess what? Your dilution is 35%, you know. It's not a half of, it's not 50 basis points, it's not one percent, it's not two percent, it's literally, you know, a third of the company.”
Gurley: Gary Steele cut Splunk's stock participation from 87% to 15%
“Gary, you know, crushed it at Proofpoint and a huge value creator, and he said, you know, in a very short window, he went, he said he took stock participation from 87% to 15.”
Mylod: Give employees cash instead of equity if they undervalue stock
“If we can't convince somebody that a dollar worth of stock is worth a dollar, Then you actually shouldn't grant it. You should just give a dollar of cash because they'll actually value it, you know, greater.”
Gurley: Netflix dilutes its share count by only 1.5% per year
“In the Netflix example I gave, you know, they're only diluting 1.5% a year, which is pretty left rail kind of thing, if you look at them on one of these charts we're going to post.”
Gerstner: Apple has a near-zero probability of outsourcing its AI to Gemini
“I put the probability of them, quote unquote, outsourcing AI to Gemini at next to zero.”
Gurley: Voice AI may be more interesting than OpenAI's Sora video generator
“And by the way, on that topic, I think voice AI may be more interesting than, say, Sora or the video stuff that OpenAI released. I think more and more people are realizing, because LLMs are language models, that people would love to just talk to them.”
Gerstner: There is a real chance TikTok shuts down within 18 months
“So I think there's a real chance that when we're looking at this, 12 to 18 months from now, that it's an absolute no go, that they can't find a middle ground and that the app is shut down.”
Gerstner: China will retaliate if TikTok US is shut down or banned
“It's hard for me to see a world where TikTok US is shut down or banned, where there's not some response by China.”
Gurley: Microsoft's Inflection deal is a warning against overpaying in AI
“This is a warning sign that you can't just pay any price For any deal in the AI sector and get paid. And cause I don't, you know, this, I don't see this now. I don't see the current status as a company that's going to have a venture-like return from here.”
Gerstner: Altimeter banned the term ARR for AI revenues
“I've banned the use of the term ARR within altimeter when we talk about AI revenues, because they're certainly not recurring.”