Why SBC distorts
ASC 718[ASC 718]records SBC as a non-cash expense; it is added back inside OCF. Equity holders still pay for it in dilution. Damodaran argues the add-back understates true cost; SEC C&DIs[SEC C&DIs]constrain how aggressively firms can publish non-GAAP "adjusted FCF" metrics that strip the offset.
Deferred revenue mechanics
Annual prepayment for a 12-month subscription becomes cash in month 1 and revenue recognised over 12. The deferred-revenue build line on the cash flow statement captures this; in a growing SaaS, that line adds materially to OCF.
Rule of 40 framing
Rule of 40 is revenue growth + FCF margin. Strict practitioners use GAAP FCF margin (SBC un-reversed); permissive practitioners use non-GAAP. The strictness choice matters: a 30%-growing firm with 15% GAAP FCF margin clears 40; with 35% non-GAAP it clears comfortably. Both numbers are defensible if disclosed.
Snowflake-style reconciliation
Snowflake's 10-K filings reconcile non-GAAP "adjusted FCF" to GAAP FCF in a footnote table. The walk usually shows SBC, employer payroll taxes on SBC, and certain transaction-related cash items as the bridge. See SNOW FY25 walk.