Two ways to count a year

The income statement counts every cost of the year, paid in cash or not. Its bottom line says whether the business made or lost money. The cash flow statement counts the cash that came in and went out. Its bottom line says how much cash the business has to spend.

Most of the time the two tell a similar story. At young software companies they can point in opposite directions.

The cost paid in equity

Software companies pay many of their engineers partly in equity: a part of the company, granted over several years. The company records the value of that pay as a cost each year, like a salary. But no cash leaves the business when it does. So the cash flow statement adds the cost back.

The more a company pays this way, the wider the gap between the two statements. The same salaries paid in cash would have come straight out of free cash flow.

Five companies, one pattern

Snowflake's operating loss was $1.4 billion in fiscal 2026. Its equity pay was $1.6 billion, and its free cash flow was $1.1 billion. Without the equity pay, its operations would have shown a profit.

CrowdStrike lost $0.3 billion on operations and made $1.3 billion of free cash flow. Its equity pay was 22.8% of its revenue. Datadog, MongoDB and Cloudflare show the same shape. Their equity pay ran between 20.8% and 22.3% of revenue, and each had a small operating loss.

Why they pay this way

These companies hire from the same small pool of engineers as the largest tech firms. Equity lets a younger company offer pay it could not yet afford in cash. It also ties the engineer to the company for the years the grant takes to vest.

The gap tends to narrow as a company grows. Snowflake's equity pay was 41.7% of its revenue in fiscal 2023, against 34.1% in fiscal 2026. Its operating margin moved from -40.8% to -30.6% over the same years. MongoDB's equity pay fell from 29.7% of revenue to 22.3%.

Counting it both ways

Living Teardown shows free cash flow after equity pay, to put the cost back in. On that count, Snowflake was negative $0.5 billion and Cloudflare negative $0.2 billion. CrowdStrike and Datadog stayed positive, at $0.2 billion each.

Netflix sits at the other end. Its equity pay was 0.8% of its 2025 revenue, so its two counts were close: $9.5 billion of free cash flow, and $9.1 billion after equity pay. When the two numbers sit far apart, equity pay is doing a large part of the paying.