After the expense for an option or award is determined, the expense is recognized over the service period of the award.
The service period is not always the vesting period. Grants issued to newly hired employees will begin vesting on the date of hire, which often precedes the grant date. Also, refresh awards that recognize an employee's contribution to date may begin vesting after the grant date.
Accounting principles to determine the service period:
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The company begins recognizing expense on the grant date
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The service period start date can not occur before the award has been authorized
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The service period ends on the vest date when service is no longer required
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The total expense recognized to date must be at least the fair value of what has vested (sometimes referred to as the 'floor' concept)
Vesting Start Date before the Grant Date
New hire grants often begin vesting on the date of hire, which usually precedes the date the company's board approves of the grant. This does not affect the service inception date as it would still be the grant date but it would shorten the overall service period.
For example, if an award is granted on December 1, 2021 with a vesting start date of September 1, 2021 and will fully vest one year after the vesting start date. This results in a service period of nine months (December 1, 2021 to September 1, 2022). Expense is recognized evenly over this nine-month period. If the total fair value of the award is $9,000, this would roughly be $1,000 per month. No expense is recognized before the grant date.
Vesting Start Date is the same as the Grant Date
Conversely, if vesting started on the grant date of December 1, 2021, the service period would be 12 months in length and the company would recognize roughly $750 of expense per month ($9,000 divided by 12).
Vesting Start Date is after the Grant Date
Refresh grants may have a vesting start date that is after the grant date. The service inception date is still the grant date because the service provided between the grant date and the future vesting start date is still required for the award to vest. Including this time period would result in a longer service period. An exception to this would be when service doesn't begin due to a performance condition or additional service requirement that needs to occur subsequent to the grant date. In this case, the vesting start date would begin after the grant date when service actually begins.
If the vesting start date is now March 1, 2022 while the grant date remains 12/1/2022. The service period would then be 15 months in length and the company would recognize roughly $600 of expense per month ($9,000 divided by 15).
Let's look at how the report calculates expenses for each of the above examples. Note that Carta's reports calculates expense based on the amount of service days provided.
Example - Vesting start date before the grant date
Reporting period - 12/1/2021 to 12/31/2021
Grant Date - December 1, 2021
Vesting Start Date - September 1, 2021
Vest Date - September 1, 2022
Days of service provided - 30 days from the grant date (column M)
Expense for the period - $985.40 (column R)
Example - Vesting start date same as the grant date
Reporting period - 12/1/2021 to 12/31/2021
Grant Date - December 1, 2021
Vesting Start Date - December 1, 2021
Vest Date - December 1, 2022
Days of service provided - 30 days from the grant date (column M)
Expense for the period - $739.73 (column R)
Example - Vesting start date after the grant date
Reporting period - 12/1/2021 to 12/31/2021
Grant Date - December 1, 2021
Vesting Start Date - March 1, 2022
Vest Date - March 1, 2023
Days of service provided - 30 days from the grant date (column M)
Expense for the period - $593.41 (column R)
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