A real expense with no cash
Equity compensation is an expense recognised over the vesting period, based on the fair value of the award at grant. It reduces reported profit without reducing cash, which is why many businesses report an adjusted figure alongside.
Valuation requires support
Establishing fair value for a private company requires a defensible valuation. Issuing options at a price that cannot be supported creates tax exposure for the recipients, which is a far worse outcome than the administrative cost of doing it properly.
The cap table is a record, not a spreadsheet
Grants, exercises, cancellations, repurchases and transfers all need recording as they happen. Cap tables reconstructed during a transaction routinely disagree with the board minutes, and resolving that is slow and expensive at exactly the wrong moment.
Forfeiture and modification
Departures before vesting reverse previously recognised expense. Extending an exercise window or repricing is a modification with its own accounting consequences. Both are routine events that are often missed.
Dilution is a separate conversation
The accounting expense and the ownership dilution are different things. Founders often track one and are surprised by the other. Both belong in board reporting.
TallyWise provides this as part of our fractional CFO services. Book a call to talk through your situation.
