Why SBC is added back
The reasoning: it is a stock grant, not cash leaving the company. The OCF reconciliation strips out non-cash charges by definition.
The case for subtracting SBC from FCF
- SBC dilutes existing shareholders; that is a real economic cost.
- If the firm wanted to keep dilution flat, it would need to buy back shares at the prevailing price; that costs cash.
- Heavy-SBC firms (SaaS) post inflated FCF margins unless reversed.
Typical SBC scale
- Mature large-cap tech: 3-8% of revenue.
- High-growth SaaS: 15-30% of revenue (Snowflake-class).
- Industrial: 0.5-2% of revenue.
- Banks: 1-3% of revenue.
Buyback-to-offset-dilution
When a firm reports SBC and an equal-dollar buyback, the net effect on shares outstanding is roughly zero. The cash leaving the business through the buyback offsets the dilution from the grant. Reading SBC without checking buyback flows produces a misleading picture.
Non-GAAP "adjusted FCF"
Several SaaS firms publish non-GAAP "adjusted FCF" that excludes SBC and certain transaction-related items. SEC C&DIs[SEC C&DIs]require equal prominence of the GAAP reconciliation.