What it means
Under GAAP, stock options and shares you give people for their work are a cost of paying them, the same as salary. The rules are in ASC 718, and the cost is called stock-based compensation, or stock comp. No cash leaves the company, but the expense still goes on the P&L.
Each award is valued once, on the grant date, at fair value. For options that comes from an option-pricing model such as Black-Scholes, which uses inputs like the share price, expected volatility and the expected term. A private company can use its 409A value as the share price input.
That value is expensed over the service period, usually the vesting schedule, starting on the grant date. The other side of the entry is additional paid-in capital, in equity. If someone leaves before vesting, the expense for the unvested part is reversed, either as forfeitures happen or through an up-front estimate, depending on your policy.
Acme grants an employee options with a grant-date fair value of $48,000, vesting over four years. Straight-line, that's $1,000 a month: debit stock comp expense, credit additional paid-in capital. A one-year cliff doesn't delay the expense, so month one carries $1,000 too. If the employee leaves after ten months, before the cliff, the $10,000 already booked is reversed.
Because it's non-cash, stock comp doesn't touch burn rate. Its real cost shows up as dilution on the cap table, and investors will add it back into the loss when they model you.
Why it matters. It's a real cost under GAAP even though no cash moves. Leave it out and your audited loss is understated, and investors will add it back in when they model you.
Try it with your numbers
Change any number. The working below updates as you type.
Total cost = Grant-date fair value per option × Options · Monthly expense = Total cost ÷ Vesting monthsStock comp expense each month
$1,000.00
How it’s worked out
- 1Total grant-date fair value$4.80 × 10,000$48,000.00
- 2Expense each month$48,000.00 ÷ 48$1,000.00
- 3Booked by the end of the 12-month cliff12 months of expense$12,000.00
| Month | Expense | Cumulative | Not yet expensed |
|---|---|---|---|
| Jan 2026 | $1,000.00 | $1,000.00 | $47,000.00 |
| Feb 2026 | $1,000.00 | $2,000.00 | $46,000.00 |
| Mar 2026 | $1,000.00 | $3,000.00 | $45,000.00 |
| Apr 2026 | $1,000.00 | $4,000.00 | $44,000.00 |
| May 2026 | $1,000.00 | $5,000.00 | $43,000.00 |
| Jun 2026 | $1,000.00 | $6,000.00 | $42,000.00 |
| Jul 2026 | $1,000.00 | $7,000.00 | $41,000.00 |
| Aug 2026 | $1,000.00 | $8,000.00 | $40,000.00 |
| Sep 2026 | $1,000.00 | $9,000.00 | $39,000.00 |
| Oct 2026 | $1,000.00 | $10,000.00 | $38,000.00 |
| Nov 2026 | $1,000.00 | $11,000.00 | $37,000.00 |
| Dec 2026 | $1,000.00 | $12,000.00 | $36,000.00 |
| Dec 2029 | $1,000.00 | $48,000.00 | $0.00 |
The cliff doesn't delay the expense: month one carries its share. The credit goes to additional paid-in capital, and no cash moves. Showing the first 12 of 48 months and the last one.
The entry, worked
Acme grants an employee options with a grant-date fair value of $48,000, vesting over four years. Acme expenses them straight-line, $1,000 a month.
| Account | Debit | Credit |
|---|---|---|
| Stock-based compensation expense | $1,000.00 | |
| Additional paid-in capital | $1,000.00 | |
| Total | $1,000.00 | $1,000.00 |
The cost lands in the P&L month by month as the employee earns the award; equity goes up by the same amount and cash doesn't move.
Common questions
Can a private company use its 409A value in the option-pricing model?
Yes. ASU 2021-07 added a practical expedient that lets a private company determine the current share price input with a reasonable valuation method of the kind described in the 409A regulations.
What happens to the expense when an employee leaves before vesting?
Expense already recognized for the unvested portion is reversed. You either estimate forfeitures up front or account for them as they occur; that's a policy election you apply to every award.
Do grants to contractors and advisors count?
Yes. Since ASU 2018-07, awards to nonemployees for goods or services are generally accounted for under ASC 718 too.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- EquityThe residual interest in the assets that remains after deducting liabilities (FASB CON 8 ¶E61)Glossary
- Stock options, 409A valuations and vesting for startupsHow option strike prices are set by a 409A valuation, how vesting and the cliff work, and why ASC 718 makes every grant an expense on your P&L.Guide · 4 min
- Burn rate and runway: how to calculate them correctlyGross burn, net burn and months of runway, done the way an investor checks them: from cash, averaged, and with the hires you’ve already committed to.Guide · 3 min
- How to read an income statement (P&L)Revenue, cost of revenue, gross margin, operating expenses and net income, read line by line, on accrual basis, with the mistakes founders make most.Guide · 7 min
- Cash flow statement explained: why profit isn’t cashHow the cash flow statement starts at net income, adds back non-cash costs and working capital, splits three activities and ties to the balance sheet.Guide · 5 min
- The accounting equationAssets = liabilities + equity is not a formula you apply at period end. It is true after every single entry, and that is what makes the books provable.Lesson 2
- Accounts, and the five typesEvery account belongs to exactly one of five types, and its type decides which side increases it. Get the type right and the entry writes itself.Lesson 3
- The balance sheetThe other three account types, at one instant — and the single line where the month's profit lands, which is what ties the two statements together.Lesson 11
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.