Stock-Based Compensation (SBC)
Definition
Stock-based compensation is pay delivered in equity instruments — options, restricted stock units (RSUs), and similar awards. Under US GAAP, the grant-date fair value is expensed on the income statement over the vesting period, reducing net income even though no cash leaves the company.
Because it is non-cash, SBC is added back in cash flow from operations, and many companies exclude it from "adjusted" EBITDA. But it is a real economic cost: it dilutes existing shareholders by increasing the share count over time.
In valuation, the debate is how to treat SBC in a DCF: treating it as a true expense (reducing FCF) or adding it back but then fully reflecting dilution in the share count. Ignoring it in both places overstates value.
Why interviewers ask
"Is SBC really a non-cash expense — should you add it back in a DCF?" is a favorite judgment question, especially for tech coverage groups. The trap is the free-lunch answer ("it's non-cash so add it back") without acknowledging dilution; strong candidates note you must count the cost either in FCF or in the diluted share count, not neither.
Related terms
Interviews don't test definitions — they test recall under pressure.
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