On Feb. 15, adtech leader The Trade Desk (TTD -0.34%) announced a $700 million share repurchase plan -- a large buyback authorization considering that it's the company's first since it went public in 2016. 

The Trade Desk has over $1.4 billion in cash, cash equivalents, and short-term investments on its books, which will more than cover those share repurchases. But the issue isn't whether The Trade Desk has enough money, but rather why it's instituting such a large buyback plan.

The answer should be encouraging for shareholders.

This is a nuanced accounting issue

The Trade Desk's share repurchase plan doesn't have an expiration date, but it does have an express purpose: Management said it's "designed to help offset the impact of future share dilution from employee stock issuances."

Many companies issue stock to employees as part of their compensation. The amount that The Trade Desk uses to reward its people is abnormally high, and this has the potential to dilute its shareholders.

Back in 2016, The Trade Desk gave founder and CEO Jeff Green a special stock plan -- the CEO Performance Option -- which kicked in during 2021. In 2022, the company had total stock-based compensation expenses of nearly $500 million, of which over half ($262 million) went to Green.

Green's compensation plan is tied to stock performance. His first tranche of 2 million shares (there are eight equal tranches) activated in late 2021 when The Trade Desk's share price briefly surpassed $90. And the company still has $399 million in expenses related to this first tranche to be recognized over the next couple of years.

Between what it has already paid and what it still has left to distribute, that first tranche amounts to an expense of over $800 million. The good news for shareholders is that Green's second tranche (and thus the next round of high stock-based-compensation expenses) doesn't activate until and unless The Trade Desk reaches $115 per share. That's roughly twice what the stock price is right now, so it's unlikely to happen soon. And it would be a good "problem" for shareholders when it happens anyway.

The other component here is that while the first tranche of the CEO Performance Option is already vested, Green didn't exercise his options in 2022. This was expressly stated in filings with the Securities and Exchange Commission. It's also easily seen in the "consolidated statements of operations" sections of those regulatory filings.

In the fourth quarter, The Trade Desk reported a weighted average for diluted shares outstanding of over 499 million for the year. For 2021, the average was just under 499 million. The change from 2021 to 2022 was less than three-tenths of 1%, even though the company has already had to record hundreds of millions of dollars of stock-based compensation expenses for accounting reasons.

What it all means

While it may look from the headline numbers like The Trade Desk is handing out new shares like candy, the reality is far more nuanced. Green can earn a lot in stock-based compensation. And the expenses the company has incurred on paper for those shares have been high so far. But the impact of that stock-based compensation has been minimal. And Green's future awards will only vest if The Trade Desk stock is a multibagger from here.

When Green does exercise his options, The Trade Desk intends to keep shareholder dilution to a minimum via its share repurchase authorization of $700 million -- that's why it doesn't have an expiration date. This is noteworthy because The Trade Desk is an expensive stock already, trading at around 18 times trailing sales. Extreme dilution would only make it look more expensive.

However, The Trade Desk is taking market share in a growing industry -- and that's the kind of company I want to be invested in for the long haul. Stock-based compensation is something I look at when researching a stock, and it can be problematic in many cases. But The Trade Desk's stock-based compensation appears to be better structured than many rival tech companies. Therefore, it's not something that will keep me from investing in it today.