ASC 718 is the Financial Accounting Standards Board (FASB) standard that governs how companies account for equity compensation under. The obligation starts on the date of the first grant — not at Series A, not at audit.
Most founders don't know that. Most startups don't find out until an auditor asks for years of expense calculations that were never run. This guide covers what ASC 718 requires, how the math works, and what getting it wrong costs.
Cake's stock-based compensation reporting generates ASC 718 reports directly from your cap table data. Learn more →
What is ASC 718?
ASC 718 is the accounting standard that requires companies to measure and record the cost of stock-based compensation on their financial statements. The core principle: when you give equity to an employee, advisor, or contractor, that equity has real economic value — and that value must appear as an expense on your books, not just as a footnote.
It applies to every US company that issues equity compensation, public or private. The standard covers stock options (ISOs and NSOs), restricted stock units (RSUs), and other equity grants. If you're issuing equity as compensation, ASC 718 almost certainly applies.
What does ASC 718 actually require?
ASC 718 requires companies to record stock-based compensation as an expense on their income statement, measured at fair value on the grant date, and recognised over the vesting period.
Before FAS 123R, companies could issue options at no accounting cost as long as the exercise price matched fair market value. That meant billions in compensation was invisible in financial statements. FASB closed that loophole in 2006. Today, any equity award under ASC 718 must be:
- Measured at fair value on the grant date
- Recognised as an expense over the vesting period
- Disclosed in financial statement footnotes
When does ASC 718 become your problem?
For most startups, ASC 718 becomes operationally urgent at Series A — when the first formal financial statement audit begins. Other triggers include crossing $10M raised, 500+ cap table stakeholders, and M&A due diligence.
What catches founders off guard isn't the standard itself. It's the data it requires. Auditors ask for the full history of every grant: grant date, shares, exercise price, vesting schedule, and fair value at grant date. If that lives across spreadsheets and email threads, you're in for a difficult few weeks. What we see on Cake: startups with clean, timestamped grant records move through compliance quickly. Those without them spend significant time and accounting fees reconstructing history under deadline.
Your 409A valuation also becomes critical at this stage — more on that below.
How to calculate fair value under ASC 718?
ASC 718 requires measuring stock-based compensation at grant-date fair value. For stock options, that means the Black-Scholes-Merton model — an option pricing formula that takes five inputs and outputs a fair value per option.
The most important input is the stock price — which, for a private company, comes from your most recent 409A. A stale 409A means wrong fair value inputs, which means wrong expense calculations. The cost of a 409A is minor compared to restating numbers because the underlying valuation was out of date.
The 409A connection
The 409A and ASC 718 serve different masters: the 409A is an IRS requirement that sets the tax-defensible fair market value of your common stock; ASC 718 is a FASB accounting requirement that uses that value as an input to calculate compensation expense. Two standards, two purposes, one shared data point.
The practical implication: they break together. A missing or outdated 409A creates problems for both tax compliance and ASC 718 calculations simultaneously. A current 409A — typically required annually, or after any material funding event — protects both. See our 409A valuation guide for how the process works.
Stock options under ASC 718
For accounting purposes, ISOs and NSOs are treated identically under ASC 718. Both are measured at grant-date fair value using Black-Scholes and expensed over the vesting period. The significant tax differences between ISOs and NSOs — ordinary income vs. capital gains treatment under the IRC — are irrelevant to the accounting.
What does matter is award classification. Most startup stock options are equity-classified, meaning fair value is fixed at grant date and recognised over vesting. Liability-classified awards are remeasured each reporting period, which adds complexity. As always, consult your accountant to determine the correct classification based on your award terms.
RSUs under ASC 718
Restricted Stock Units fall under ASC 718, but the valuation method differs from options. Where options use Black-Scholes to price exercise uncertainty, RSUs are typically valued at the grant date stock price — simpler math, same expense recognition and disclosure requirements.
RSUs are more common at later stages (Series B+) because they trigger a taxable event at vesting, which is a poor outcome when the company has no liquidity. Most seed-to-Series A companies stick with options. When RSUs do appear, they're subject to the same 409A timing requirements and audit scrutiny as any other award type.
Recognising the expense — vesting schedules
ASC 718 spreads the cost over the service period as vesting occurs — not upfront on grant date, not at exercise. Two methods apply: straight-line (total fair value spread evenly across the vesting period, simpler) and tranche-based (each vesting tranche treated as a separate award, more precise but complex). Your auditor will guide the choice based on your grant structure and accounting policy.
Modification accounting is also worth knowing: if you change the terms of an existing grant — extending an exercise window, repricing, or accelerating vesting — ASC 718 treats that as a modification and can trigger incremental compensation expense.
How Cake simplifies ASC 718 reporting
Most startups find ASC 718 reporting painful because their grant data is scattered across emails, old spreadsheets, and half-remembered board approvals.
Cake's stock-based compensation reporting pulls directly from your existing grant history and vesting schedules, so you're not reconstructing anything from scratch. Set your reporting period, choose straight-line or tranche-based, input fair values, and export a clean CSV for your auditor.
Learn more about Cake's stock-based compensation reporting.
Common ASC 718 mistakes
Most problems come from the same four sources:
Spreadsheets past their useful life
A spreadsheet handles one grant cleanly. It breaks down across dozens of grants, amendments, and terminations — and a single formula error misfires across multiple reporting periods.
Missing forfeiture accounting
When an employee leaves before vesting, previously recognised expense must be reversed. This is the most commonly missed step in manual processes.
Incomplete grant records
Black-Scholes requires precise inputs. Missing or reconstructed grant dates and vesting schedules produce estimates — which auditors push back on.
Waiting until audit
Retroactive ASC 718 calculations covering three to five years of grants are a common and expensive Series A surprise. The earlier you start, the lower the cost.
Disclosure requirements
Beyond the expense line, ASC 718 requires detailed footnote disclosures — and this is where auditors spend most of their review time. Required items include: plan descriptions, valuation method and assumptions, weighted-average grant-date fair values, a roll forward of grant activity (issued, exercised, forfeited, expired), and total unrecognised compensation cost.
Forfeitures and modifications are the most commonly incomplete. Both need to be in your cap table to produce clean numbers.
ASC 718 vs IFRS 2
US C-Corps follow ASC 718. Non-US entities, or US companies with international subsidiaries reporting under international standards, follow IFRS 2 (International Financial Reporting Standards) — conceptually similar but with differences in modification accounting and liability-classified awards.
For US startups hiring internationally, the parent company's financials still follow ASC 718. The employee's local tax treatment is a separate question.
When does a startup need to start following ASC 718?
Technically from the first equity grant. In practice, most startups first face formal requirements at Series A, when investors require audited GAAP financials. Starting earlier means less retroactive work.
Do private companies have to comply with ASC 718?
Yes. ASC 718 applies to all US companies issuing equity compensation, regardless of size or stage.
What is the Black-Scholes model?
Black-Scholes is the option pricing formula most commonly used to calculate the fair value of stock options under ASC 718. It takes five inputs — stock price (from your 409A), exercise price, expected term, risk-free rate, and volatility — and outputs a per-option fair value. Your CPA runs the model; your job is to make sure the underlying grant data is complete and accurate.
Does ASC 718 apply to RSUs?
Yes. RSUs are valued at grant date stock price rather than Black-Scholes, but the same expense recognition and disclosure requirements apply. RSAs, SARs, and ESPPs are also covered under ASC 718.
What happens to ASC 718 expense when an employee forfeits their options?
Previously recognised expense for unvested shares is reversed. You stop recognising future expense for the forfeited portion. This is why tracking terminations promptly in your cap table platform directly affects the accuracy of your reported numbers.
Getting ASC 718 right starts with your data
ASC 718 isn't uniquely complex — it's an accounting standard with clear rules. What makes it hard is when the underlying data isn't clean: grant dates guessed rather than recorded, fair values missing, modifications never logged.
The startups that move through their first audit smoothly treated their equity records as financial records from day one. Clean grant history, current 409A valuations, and consistent tracking of every modification and forfeiture — that's what ASC 718 compliance actually requires in practice.
This article is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.
