Stock compensation: Mind the non-GAAP Dream of future profits at internet companies and think of higher diluted share counts Dodgy measures of value are the handmaid of every internet company initial public offering. Fifteen years ago, the metric was "eyeballs." More recently, the US Securities and Exchange Commission forced Groupon to stop talking about "CSOI," a measure of profits that, hilariously, excluded marketing costs. Recently, the SEC wondered aloud about the "user" figures cited by social media companies. Twitter mania has again brought attention to earnings before interest, taxes, depreciation and amortisation - ebitda - presented with expenses from stock options granted to employees added back. Adjustment period Stock options are the lifeblood of tech start-ups. Starved for cash, they hire employees with the promise of IPO riches. Rules implemented a decade ago require that companies use a "fair value" method, similar to the Black-Scholes equation, to assign a dollar cost to employee equity grants. This expense is recognised on the income statement to reflect the economic value of compensation. Most analysts take it back out, arguing that no cash has changed hands. Whether this is wise is debatable. In Twitter's case, adjusted ebitda for the first nine months of 2013 was $31m. But the number was positive only because $79m in stock comp expense was left out. Whether or not these expenses are ignored in earnings calculations, observers should think hard about share counts. Equity grants comprise a quarter of Twitter's 700m total diluted shares. Facebook's reported diluted share count is up a third from June last year. Company models that use static shares outstanding to calculate share values should reflect the cash expense of buying back shares, or otherwise ensure operating expenses include the full costs of paying employees. Then again, precision in valuing Twitter does not seem much in vogue at the moment.