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.

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.

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.

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.

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.

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.

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).

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

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

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.

Pulley's SBC tool provides comprehensive disclosure calculations required for financial statement footnotes. The tool generates the applicable disclosures for stock options, RSAs, and RSUs for the specified expense period. Disclosures shown in the report include, but are not limited to:
1. Weighted Average Exercise Price
2. Weighted Average Remaining Contractual Term
3. Aggregate Intrinsic Value
4. Weighted Average Grant Date Fair Value
5. Fair value assumptions
6. Roll forward schedules detailing grants, exercises, expirations, and forfeitures

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.