Guide

Unit economics and finance

EBITDA and net income

Gross profit is after delivery. Operating income is after opex. EBITDA adds back D&A. Net income is after interest and tax.

64 of 135 · 3 min read

Four profit numbers sit on the same P&L. They answer different questions. Mixing them is how "we're profitable" comes to mean four different things in one board meeting.

NumberAfter what is subtractedWhat it tells you
Gross profitCOGS onlyCan delivery ever fund the company?
Operating incomeS&M, R&D, G&A (and usually D&A)Does the core business make money before financing and tax?
EBITDASame as operating, then D&A added backOperating performance proxy; popular in comps and debt talks
Net incomeInterest and tax tooThe bottom line. For loss-making startups, often less useful day-to-day than net burn

Concept

EBITDA is earnings before interest, taxes, depreciation and amortization. Early startups often have little D&A, so EBITDA ≈ operating loss with a nicer name. Later, stock-based compensation and depreciation matter — public SaaS filings break them out.

Walking through add-backs

Adjusted EBITDA adds back stock-based compensation (SBC), restructuring, sometimes "one-time" items. Useful for comps. Dangerous when every month has a one-time item. When someone quotes profitability, ask: GAAP or adjusted? Including or excluding SBC?

Public companies often highlight non-GAAP that adds SBC back. Know which lens you are using before you compare.

Ratios off the P&L

Gross margin %           = Gross profit / Revenue
S&M % of revenue         = S&M / Revenue
R&D % of revenue         = R&D / Revenue
G&A % of revenue         = G&A / Revenue
Operating margin %       = Operating income / Revenue

Same $4.2M revenue, two shapes:

Growth modeEfficient mode
Revenue$4.2M$4.2M
GM78%80%
S&M$3.2M (76%)$1.8M (43%)
R&D$2.0M (48%)$1.6M (38%)
G&A$0.9M (21%)$0.7M (17%)
Op. income−$2.92M−$0.86M

Same top line; $2M less annual operating loss. The efficient company may be growing slower — or it may have better unit economics and simply not waste S&M. If fully loaded average cost is $200k/year and S&M is $3.2M, that is roughly 16 S&M bodies all-in, or fewer people with heavy ad spend. Ask how much of S&M is people vs paid media.

How the shape changes by stage

StageRough shapeWhat "good" looks like
Seed / pre-PMFTiny revenue, R&D-heavy opex, deep lossesLearning fast without lighting cash on fire
Series A–BRevenue ramping, S&M rising faster than revenue for a whileImproving unit economics, payback under control
Growth / late stageGross margin stable/high, S&M efficiency improvingPath to operating leverage visible
Public SaaSMix of growth and profitabilityDurable GM, expanding op margin or elite growth

The Rule of 40 lives at public scale: growth % + profit % as a combined score.

Common mistakes

  • Adding back everything painful and calling it EBITDA.
  • Celebrating "we spent a lot on sales" as ambition without payback.
  • Ignoring SBC when comparing to public comps.

Check yourself

  1. Operating income is −$2.92M and D&A is $0.1M. What is EBITDA? About −$2.82M (add D&A back).
  2. Someone says "we're profitable" after adding back SBC and three one-time items. What do you ask? GAAP or adjusted? Which add-backs, and do they happen every quarter?

Key takeaways

  • Gross profit, operating income, EBITDA and net income are different questions.
  • EBITDA adds back D&A. Adjusted EBITDA can add back anything — ask.
  • Read opex as % of revenue, and ask how much of S&M is people vs media.
  • Pair the P&L shape with growth rate and payback, not with spend as a virtue.

Further learning

A full year of numbers: a $5M ARR P&L.

The P&L for startups

Reading and building an income statement — revenue recognition, COGS, S&M / R&D / G&A, EBITDA and net income — with a worked $5M ARR SaaS example.

Income statement lines

Revenue minus COGS is gross profit. Minus S&M, R&D and G&A is operating income. Headcount dominates the opex lines.

Burn, runway and default alive

Calculating burn and runway, the default-alive test, and how to extend runway.