SBC
Stock-Based Compensation · Share Dilution
Compensating employees and management with company shares or options — a real cost for shareholders even though no cash leaves the company.
What it is
SBC (Stock-Based Compensation) is a form of compensation where the company gives employees shares (RSUs — Restricted Stock Units) or options (stock options) instead of cash. It is not recorded as a cash expense in the cash flow statement, but manifests in two ways:
- →On the income statement as an expense (reduces EBIT and net income)
- →As share dilution — the company issues new shares → existing shareholders have a smaller percentage ownership
Share Dilution: When a company issues new shares (SBC, convertible bonds, equity raises), the share count grows → your ownership stake gets "diluted." Even if the absolute value of the company remains the same, your percentage ownership declines.
Example: You own 100 shares out of 1,000 total = 10%. The company issues 100 new shares as SBC → 1,100 shares total → your stake is 100/1,100 = 9.1%. Without selling a single share.
Why track it
Many technology companies report high FCF but ignore SBC — yet SBC is a real cost for shareholders. Analysts therefore calculate FCF after SBC:
Monitor the SBC / Revenue ratio. Above 5–8% at a mature company is a warning sign. At growth startups SBC can be 10–20% of revenue — acceptable if the company is growing rapidly.
Also monitor the trend in share count — is it rising or falling? Falling = buybacks exceed SBC (positive). Rising = company is diluting shareholders.
Real-world example
Watch out for
Beware of companies reporting "non-GAAP EPS" that excludes SBC — this artificially improves reported profitability. SBC is a real cost because it dilutes your ownership stake. Compare GAAP and non-GAAP figures and always monitor the share count trend.