Quick technical question - when doing a DCF for tech companies that have SBC, which is reasonably recurring since SBC seems common for engineers and what not, do you add SBC when calculating unlevered free cash flow in the process of doing non-cash adjustments (in addition to D&A)? Seeing conflicting information so would be nice to get a definitive or well backed answer. Thanks.
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I'm not a tech banker but I can answer from first principles and common sense.
Company A and Company B are identical except that A pays its employees in stock while B sells its stock and hands employees the cash proceeds instead.
Should that A and B have different valuations for that reason?
Hint: obviously not. My strong inclination would be to treat SBC as a cash expense. Note again I'm not a tech banker and I wouldn't be surprised if they employ all sorts of alchemy/fuckery/sophistry to reach a different conclusion
There are other cases where SBC should matter though. A debt investor should treat SBC as a non-cash expense because they benefit at the expense of the equity.
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