Stock-Based Compensation (SBC)

Stock-based compensation is pay delivered in equity — options and restricted stock units — instead of cash. It is expensed on the income statement, then added back on the cash flow statement as a non-cash charge, which is exactly where the controversy starts.

SBC is a real cost paid by shareholders rather than by the company: every vested RSU adds shares, and more shares mean each existing share owns a smaller slice of the business. A company can show strong free cash flow while transferring several percent of itself to employees annually, which is why many analysts subtract SBC from FCF before valuing tech companies.

Scale check: mature large caps typically run SBC at 1-3% of revenue; younger software companies frequently exceed 10-20%, and at that level reported FCF and the shareholder's economic reality are different numbers.