All Collections
Stock Based Compensation
Pulley’s Stock-Based Compensation Guide FAQ
Pulley’s Stock-Based Compensation Guide FAQ
Support avatar
Written by Support
Updated over a week ago

1. What is stock compensation/stock-based compensation (SBC)?

  • Answer: Stock compensation is a form of payment where employees receive shares of the company's stock as part of their compensation package. This method aligns the interests of the employees with those of the company and its shareholders, as the value of the compensation is tied to the company's stock performance. Vendors and consultants (non-employees) may also be issued share-based payments.

2. What are the different types of grants that would elicit stock compensation?

  • Answer: The most common types are stock options, restricted stock units

    (RSUs), and restricted stock awards (RSAs). Stock options give employees the

    right to buy company stock at a predetermined price. RSUs and RSAs are

    company shares given to an employee which vest over time.

3. How does stock compensation affect company financials?

  • Answer: Stock compensation is considered an expense for the company and

    must be reported in the financial statements. The expense is generally

    recognized over the vesting period of the stock awards. Financial Accounting

    Standards Board (FASB) Accounting Standards Codification (ASC) 718,

    Compensation — Stock Compensation is the guidance that companies must

    follow to be in accordance with US Generally Accepted Accounting Principles

    (GAAP).

    Under ASC 718, the primary accounting treatment of stock options requires

    recognizing compensation cost for all share-based payments granted to

    employees and non-employees. This cost is measured as the fair value of the

    equity instruments issued, which is typically determined at the grant date using

    an option pricing model like Black-Scholes. The total amount to be expensed is

    determined by the grant-date fair value and is generally recognized over the

    vesting period of the stock options. Companies must also disclose the nature and

    terms of such arrangements, how the fair value of share-based payment awards

    is determined, and the effect of share-based payment transactions on the income

    statement. This approach ensures that the cost of stock options is reported in a

    way that reflects their economic value and the cost of employee services.

4. What happens to stock compensation if an employee leaves the company?

  • Answer: This depends on the company's stock compensation plan. Generally, unvested incentive awards are forfeited if an employee leaves and the stock compensation stops being recognized as of the termination date.

5. When does my business need to start recording stock based compensation in their financials?

  • Answer: Companies need to account for stock compensation when they grant

    stock options, RSUs, or other equity-based compensation to their employees.

    According to the Financial Accounting Standards Board (FASB) Accounting

    Standards Codification (ASC) 718, Compensation — Stock Compensation,

    companies must measure the cost of employee services received in exchange

    for an award of equity instruments based on the grant-date fair value of the

    award. This cost is recognized over the period during which an employee is

    required to provide service in exchange for the award, typically the vesting

    period.

    However, some private companies may choose to wait to record the expense

    until they need to get their first audit or have some other covenant requiring them

    to maintain their books and records in accordance with US Generally Accepted

    Accounting Principles (GAAP). This generally happens around the time a

    company is ready to raise a Series A or Series B.

6. How are stock options valued for accounting purposes?

  • Answer: There are several models for valuing stock options, including the

    Black-Scholes Model, the Binomial Model, and Monte Carlo Simulation. The

    Black-Scholes Model is widely used because of its simplicity and effectiveness in

    situations where market data is limited. For private startup companies, which

    often don't have a trading history or market price for their shares, the

    Black-Scholes Model provides a reasonable and accepted method for estimating

    the fair value of service-based incentive grants. It's particularly effective in

    estimating the value of options for these companies because it relies on inputs

    like expected term, volatility, risk-free rate, and dividend yield, which can be

    estimated even when market data is scarce.

    Pulley’s SBC Tool utilizes the Black Scholes Option Pricing model to calculate the

    fair value of options.

7. How are RSUs and RSAs valued for accounting purposes?

  • Answer: ASC 718 requires all share-based payments to be estimated using a

    fair-value based measurement. For nonpublic entities, Pulley’s SBC tool uses the

    practical expedient under ASU 2021-07 and uses the 409A value as the current

    price of the underlying share for purposes of determining the fair value of an

    award that is classified as equity. As such, the fair value of an RSU or RSA is

    estimated as being the value of one common share in the company as

    determined by the 409A valuation in effect at the measurement date. For RSUs

    or RSAs with terms different from the common stock valued using the 409A

    approach, adjustments to the fair value estimate may be required (ex: awards

    with market conditions, certain post-vesting restrictions).

8. How does Pulley’s SBC tool work?

  • Answer: Refer to our Methodology Guide for detailed answers to the accounting

    treatment, elections utilized, and methodologies employed by Pulley’s SBC tool.

9. Does the tool support award repricings?

  • Answer: Pulley’s SBC tool does not yet support award repricings. If repricings

    have occurred, please consult with your accountant and/or auditor for

    adjustments that may need to be made.

10. Does Pulley’s SBC tool show the disclosure calculations for the footnotes in the financial statements?

  • Answer: Pulley’s SBC tool does not yet show the disclosure calculations for the footnotes in the financial statements. Please consult with your accountant and/or auditor for proper treatment.

11. Does the tool support award modifications?

  • Answer: Pulley’s SBC tool does not yet support the impacts of modifications

    made to awards. If modifications have been made, please consult with your

    accountant and/or auditor for adjustments that may need to be made.

Did this answer your question?