Carta’s SBC Expense Report will provide a journal entry for the period expense of the reporting period. To understand how that amount is determined, companies need to know how the cumulative amount of expense is determined. Afterwards, the current period expense is simply an adjustment between the cumulative expense in the current reporting period and the cumulative expense in the prior reporting period.
Each reporting period will first determine the cumulative amount of expense that should be recognized by considering all the latest updates to the cap table including:
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New grants
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Terminations
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Cancellations
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Modifications
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Performance conditions
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Forfeiture rates
Cumulative Expense Example
Let’s use a simple example where an award is granted on 8/1/2023 for 1,460 stock options vesting 25% annually (365 annually over 4 years):
For simplicity, let’s assume the fair value per share is $1/share so expense is $1/day.
If the company’s fiscal year ends December 31, then the cumulative amount of expense for 2023 is $152 for the 152 service days provided between 8/1/2023 and 12/31/2023. The cumulative service days provided as of 2024 would be $517 for the 517 service days service between 8/1/2023 and 12/31/2024. And so on…
At $1/day, if the cumulative expense recognized in 2023 is $152 and the cumulative amount of expense for 2024 is $517, then the company only needs to recognize $365 for the 2024 period because it already recognized $152 in 2023.
Example Reversal For Forfeitures
Using the same previous example stock option, the cumulative amount of expense in 2025 is $882. Therefore, the company only needs to recognize $365 for the 2025 period because it already recognized $517 as of 2024.
However, let’s assume that the employee terminates service on 7/1/2025, just shy of the 8/1/2025 vest date. This means that 1,095 options will never vest and are considered forfeited.
As for the 335 days of service provided between 8/1/2024 up to 7/1/2025, that service is not considered as it relates to forfeited options that will never vest due to termination.
The employee earned in total 365 stock options for the service it provided to the company between 8/1/2023 and 8/1/2024. At $1 per share, the company should recognize a cumulative amount of expense of $365 as of 2025.
To recap, the company recognized $152 in 2023 and $365 in 2024. In 2025, service terminated the company should recognize a credit adjustment of $152 to bring the cumulative expense to $365
Let’s see how this is reflected in Carta’s reports. The ‘tranches’ tab details each vesting tranche for each award and calculates the cumulative amount of expense.
For the 2023 reporting period, 152 cumulative service days have been provided to the first vesting tranche so a cumulative amount of expense of $152 should be recognized. No expense was recognized in any prior periods so all $152 is recognized in 2023.
For 2024, 517 cumulative service days have been provided (365 to the first tranche and 152 to the section tranche) so a cumulative amount of expense of $517 should be recognized. Since $152 was already recognized in the prior periods, only $365 is recognized in 2023.
For 2025, the termination date entered on the cap table forfeits the last 3 vesting tranches. Cumulative expense is now only $365 for the 365 options that vested in the first vesting tranche. Since $517 was recognized in prior periods, a credit adjustment of $152 will be recognized in 2025.