By Michael Esposito, CEP
When it comes to financial reporting associated with equity compensation, private companies face tough challenges. Determining a valid stock price volatility and calculating a value to your awards can be more difficult for private companies than for their publicly-listed peers. And, if you’re like many individuals in privately-held companies, equity comp is one of many different hats you wear from one day to another. In other words, it’s not your career. That’s okay. It doesn’t have to be.
This ebook explains the basic principles and terminology that individuals responsible for equity compensation reporting should understand in order to properly calculate and report the expense under ASC 718. It’s an introductory guide and does not include advanced topics. Feel free to reach out to Solium if you need more assistance.
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In this guide, you’ll find an explanation of terms of those most relevant to privately-held companies that grant employee stock options. An understanding of these terms will help you accurately report your equity compensation expense. We will consider the following three categories – valuations, expensing and disclosures.
Before you can determine how much expense to take with respect to your non- cash equity compensation, you need to value the stock option grant. The fair value of the stock option is most commonly determined for privately-held companies using the Black-Scholes formula. The formula has a number of variables, which are described in this section. You’ll find user-friendly definitions for fair market value, exercise price, expected term, interest rate, volatility and dividend rate.
Once you have determined the fair value of a stock option on its date of grant, you now can calculate the total value to the participant (or the total expense to the company). This expense is not booked all at once but is instead accrued throughout the vesting period of the grant, otherwise known as the “service period.” The speed and timing of which this expense is accrued can be done via different expensing methods.
In addition to determining how much equity compensation expense to include in the total compensation expense number, you’ll need to make a number of common disclosures in the footnotes of your financial statements.
There are many numbers related to option plans and equity compensation that need to be reported to explain the option plan, the options granted and expensed, how the amount of expense was determined and the range of values used. The terms in this section will help you properly prepare your equity compensation disclosures as required by ASC 718.Download the full ebook