The straight line amortization method is the idea of expensing an equity award of each vesting tranche sequentially where the first vesting tranche is fully expensed before the subsequent vesting tranche begins to expense.
For awards with multiple vesting tranches, Carta’s SBC expense reports will treat each vesting tranche as its own award with its own service period (ASC 718-10-35-8a) to ensure the minimum amount of expense recognized is at least the fair value of what has vested.
Service Periods
Each vesting tranche is assigned its own service period. The service period cannot begin until the award is authorized (ASC 718-10-35-6 & ASC 718-10-55-108). Carta considers an award to be authorized on the grant date.
Vesting Start Date Precedes Grant Date
It’s common for awards to begin vesting upon the hire date while the award is granted at a later date. If actual vesting has occurred on or prior to the grant date, the fair value for the vested portion will be recognized immediately upon the grant date.
If an award is subject to a vesting cliff and no actual vesting has occurred as of the grant date, the vesting start date preceding the grant date would shorten the service period of the vesting cliff.
For example, let’s look at an award for 4,000 stock options that vest 25% annually along with a fair value per share of $1. Vesting begins on 8/1/2023 but the award is not granted until 9/15/2023. Therefore, the 45 days of vesting prior to the grant date (8/1/2023 - 9/15/2023) are not considered to be part of the service period:
The service period for the first 25% of options begins on 9/15/2024 and ends on 8/1/2024. The service period for the second 25% of options begins at the end of the first 25% of options. And so on…
Note that the service period for the first tranche is shorter at 321 days than the other tranches at 365 days. As a result, the $1,000 fair value ($1 per share * 1,000 options) of the first 25% tranche amortizes at an accelerated $3.11/day ($1,000 / 321 days) while the latter tranches amortizes at $2.74/day ($1,000 / 365 days):
On the actual vest date of 1,000 stock options on 8/1/2024, the $3.11/day amortization will result in at least $1,000 of expense recognized.