I'm working with a startup that has issued common stock to both employees and several Advisors. They are using deferred compensation line in the GL to book the unvested portion for the employees and relieving it each month after vesting commences. I'm wondering if the company Advisors should receive the same treatment, given that they aren't employees but it is a form of compensation. Appreciate any guidance.
Accounting for stock grants to non employees
Answers
Not clear from your comment, but I am treating this as a question on option expense under FAS 123R. You should compute the derivative value of all options granted using a Black Scholes or alternative model. The value of the option grant should be expensed on an employee or advisor specific vesting schedule to reflect the service period expired in relation to the vesting term. You may wish to have two GL accounts, one for non-cash compensation expense of employees and another for non-cash compensation expense of advisor consultants, but both should be provided and charged to PL on a monthly basis.
I have never booked unvested option expense as deferred compensation.
I agree with the comment about
There is another issue related to taxes, and while I can't provide guidance here, will observe that there are qualified plans available to employees and non-qualified plans available to consultants. It is fiendishly complex, and you need expert guidance. There are also fairly standard methods used, for grants, vesting, etc.
I also agree with Simon's comments -- value the options using a Black-Scholes formula, expense the options as they vest, but don't carry the unvested portion as deferred comp. For internal reporting, I've generally shown the expense separately so it's clearly identifiable as a non-cash item.
The above answers are correct, in each case the total fair value of the award (the Black-Scholes value times the number of shares granted) will be amortized over the service period as stock compensation expense.
Also note that if the advisors are non-employee consultants (not a Board of Directors), then their awards should be revalued at each expense period, meaning a new Black-Scholes would be calculated at the end of each period and used to expense the shares amortized during that period. Also, depending on the relationship with the advisor, (i.e., if it is a consultant role), then the inputs into the Black-Scholes will vary. For example, the expected life of an award for a consultant is generally the remaining contractual life (to expiration, or specific contract end), rather than just calculated using a simplified method.
The ISO options that can be granted to employees are stock-incentive options and don't generate a deferred
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