Share based compensation

Share based compensation is compensation the company chose to settle in shares or options. It is expensed over the vesting period at the grant date fair value of the award, so it reduces reported profit like any other pay.

Because no cash leaves the business, it is added back in the operating section of the cash flow statement. That add back is correct as cash accounting and dangerous as valuation input, because the cost is real: it is borne by existing shareholders through dilution rather than by the company through cash.

There are two defensible treatments in a DCF. Either expense it in the forecast cash flows, charging the cost where it is incurred, or add it back but grow the fully diluted share count over the forecast to capture the dilution. Doing neither, which is what an unadjusted adjusted EBITDA does, systematically overstates value.

It matters most where it is largest. In software and biotech it can run to a substantial share of operating expense, so a peer set mixing companies with very different SBC intensity needs the adjustment made explicitly before the multiples mean anything.