Stock‑Based Comp in DCF — Do You Add It Back? (Advanced)
2025-08-21
Technical
Valuation
DCF
• 1 min readTrade-offs of SBC add-backs, dilution vs. cash, and how to treat SBC in unlevered FCF and equity bridge.
SBC in DCF: cash vs dilution
Stock‑based compensation is a non‑cash expense, so it is commonly added back in unlevered FCF. But investors price dilution. You need a consistent framework: add back SBC in UFCF and capture dilution in the equity bridge (or adjust operating margins to exclude SBC and keep share count static).
Two consistent approaches
| Approach | UFCF Treatment | Share Count | Pros | Cons |
|---|---|---|---|---|
| Add-back + diluted shares | Add back SBC to EBITDA → UFCF | Use diluted shares in bridge | Matches cash reality | Requires careful dilution modeling |
| Exclude SBC from margins | Model EBIT margins pre-SBC | Use basic shares | Cleaner operating compare | Folds economic cost into margins |
Interview guidance
- Say you add back SBC in UFCF but account for dilution when moving to equity value
- Name the alternative and why teams pick it (comparability to peers)
- Mention comp mix shifts (RSUs vs options) and their effects on dilution
Downloads
Get a DCF template with both SBC treatments here.
Download a dilution bridge cheat sheet here.