The Accounting Standards Codification Topic 718 (ASC 718), issued by the Financial Accounting Standards Board (FASB), is the U.S. GAAP standard that requires companies to recognize and report the cost of all stock-based compensation (stock options, restricted stock units, performance shares, and profit interest units) as expenses on their income statements.

Startups today rely on equity and stock-based compensation more than ever. With cash constraints, many early-stage companies use stock options or RSUs as a way to attract, retain, and motivate top talent while conserving cash.

The “State of Startup Compensation: H1 2025” report from Carta shows that while base salaries have increased in many roles, equity packages often remain static, yet are still a major part of total compensation packages for employees.

Unfortunately, complying with ASC 718 can be difficult and technical. Many startups assume that only Big Four auditors can properly guide them through fair value determination, disclosure, modifications, vesting schedules, and financial statement requirements.

Engaging a Big Four firm is often expensive, and early-stage companies may lack the required budget and internal expertise. Still, failing to satisfy ASC 718 compliance, even without a Big Four auditor, can lead to investor pushback or audit findings.

In this guide, we’ll simplify ASC 718 for startups. You’ll get proven compliance strategies that will support your startup’s growth and keep costs manageable.

What is ASC 718?

ASC 718 is a U.S. GAAP standard promulgated by the Financial Accounting Standards Board (FASB).

It details how a company must account for stock-based compensation: stock options, restricted stock units (RSUs), restricted stock awards, employee stock purchase plans (ESPPs), and other similar equity or liability awards to employees or nonemployees in exchange for service.

Under ASC 718, the cost of equity grants must be measured, recognized, and disclosed in the financial statements in a standardized way. The standard covers measurement, classification (equity vs liability), timing of expense recognition (usually over a vesting or service period), and disclosures.

Why ASC 718 is Important for Startups

Investors, lenders, and potential acquirers expect clean, GAAP-compliant reporting of equity awards because stock-based compensation affects reported expenses and the dilution picture for shareholders.

The baseline authority for how to measure and recognize these awards is the FASB’s ASC 718 guidance. Hence, it’s important to get it right to gain investors’ confidence.

Here’s why ASC 718 matters for startups:

Growing investor scrutiny on transparent financials

VCs and institutional investors want accurate expense recognition, reconciled cap tables, and defensible valuations for option grants.

During diligence, they focus on whether option grants were valued correctly (grant-date fair value), whether vesting and modification accounting were applied consistently, and whether disclosures are complete.

Poorly documented or inconsistent equity accounting raises immediate red flags and slows or kills deals. GAAP-ready equity reporting shortens diligence timelines and reduces renegotiation risk.

SEC compliance expectations for venture-backed startups

The SEC’s outreach on executive-compensation disclosure shows that regulators are reevaluating how compensation is reported and disclosed.

While the SEC’s focus often centers on public companies, its actions shape investor expectations and disclosure norms for private companies preparing for rounds, secondary transactions, or IPOs.

Startups that treat compensation disclosure as an afterthought may find themselves unprepared if regulatory expectations rise further.

Risk of misstated financials without ASC 718 compliance

Mistakes usually emanate from incorrect 409A practices, improper modification accounting, or failure to expense awards over the correct service period. These errors can lead to restatements, tax penalties (e.g., 409A consequences), and loss of investor trust.

Startup-focused accounting advisors routinely advise maintaining periodic 409A valuations and automated equity-tracking to lower these risks.

Building trust with VCs and acquirers

Apart from compliance, ASC 718 discipline ensures transparent, well-documented equity accounting, which shows that your finance function is operating at investor-grade standards. It simplifies term negotiation, enables faster closings, and preserves valuation leverage.

In M&A or follow-on rounds, buyers and lead investors reward companies that present defensible option valuations, consistent ASC 718 treatment, and robust disclosures, since those things reduce post-deal surprises and integration work.

Steps for Expensing Stock-Based Compensation Under ASC 718 Without Big Four Help

When a startup issues equity to employees, ASC 718 requires that the fair value of those awards be measured and recognized as compensation expense. For many early-stage companies, engaging a Big Four auditor for every step is expensive and often unnecessary, but compliance is still rigorous.

Here are practical, audit-ready steps you can take to meet ASC 718 requirements while keeping costs predictable and controlled.

Step 1: Obtain an accurate 409A valuation

Before you can expense options under ASC 718, you need a defensible fair market value (FMV) for your common stock.

A Section 409A “safe harbor” valuation performed by a qualified independent appraiser is the market standard: when done within 12 months of grants (or after a material event), it shifts the burden to the IRS to prove unreasonableness.

For startups, getting an annual 409A or event-driven update (e.g., financing, M&A talk) is important for tax safety and to support the grant-date measurement under ASC 718. Use a reputable valuation provider and retain the valuation report in your file.

Keep a one-page valuation summary for the finance file that highlights assumptions (discount for lack of marketability, probability-of-exit, comparable metrics). Auditors and investors ask for this first.

Step 2: Select the correct option-pricing model (Black-Scholes vs Monte Carlo)

ASC 718 permits the use of the pricing technique that best reflects the award’s terms. For plain-vanilla, time-vested awards on private-company common stock, the Black-Scholes-Merton model is commonly used because it is straightforward and well understood.

However, awards tied to market conditions (e.g., performance measured by company stock price or market-based vesting) generally require a forward-looking technique such as Monte Carlo simulation. This is because it models the distribution of possible outcomes and satisfies ASC 718’s requirement to reflect market contingencies.

Choose the model that matches the award’s economics and be ready to explain why that model was chosen.

Step 3: Apply the proper expense recognition method

ASC 718 requires that the grant-date fair value be recognized over the requisite service period (usually the vesting period).

Common approaches include straight-line expense recognition for awards that vest evenly or graded-vesting (accelerated) schedules if vesting is front-loaded; make sure your method aligns with the award terms and the standard’s guidance.

If awards are modified (repriced, accelerated), you must account for the incremental value attributable to the modification. Record journal entries consistently and keep support for the amortization schedule.

Build an amortization schedule that ties grant date fair value to monthly P&L expense lines; this simplifies payroll accounting and creates a clean audit trail.

Step 4: Document vesting schedules and modifications

Vesting details (time-based, performance, cliff, market conditions) drive the measurement and timing of expense. When you modify awards, for example, replace underwater options or accelerate vesting, ASC 718 requires separate analysis to determine incremental compensation cost.

Keep signed grant agreements, board minutes approving grants/modifications, and a change log showing the reason and calculation of any incremental values. This documentation is what smaller auditors or an internal reviewer will request first.

Standardize grant paperwork with templates that include all inputs (exercise price, FMV reference, vesting terms, board approval date).

Step 5: Generate compliant financial-statement disclosures

ASC 718 mandates disclosures about the nature and terms of awards, the expense recognized, and assumptions used in valuations (e.g., volatility, expected term).

Even private-company financials intended for investors should include clear tables: total compensation cost recognized, weighted-average assumptions, and a reconciliation of outstanding awards. Use disclosure examples from accounting firms as templates to ensure you don’t miss required items.

Include a short “valuation assumptions” appendix for investor decks so external reviewers can quickly reconcile the P&L to the valuation inputs.

Step 6: Use automation and ASC 718 software to streamline reporting

Modern equity-management and ASC 718 software automate grant tracking, valuation inputs, model runs, and journal-entry generation. They reduce spreadsheet error, store audit trails, and produce standard disclosures (these are important when you’re avoiding the Big Four on day-to-day work).

Evaluate software for:

• Support for Black-Scholes and Monte Carlo
• Integration with payroll and cap table
• Audit log and report exports

Automation doesn’t replace professional judgment but multiplies it. Choose a tool that can export the amortization journal in CSV format to upload directly to your accounting system.

Components of ASC 718 Every Startup Must Understand

If you’re dealing with stock-based compensation under ASC 718, it’s important to understand the following components as they determine how you expense, report, and remain compliant without needing a Big Four auditor.

Grant Date and Measurement

Grant date is the date when the company and the recipient have an agreement on the award and all the substantive terms. That date is important for equity-classified awards because ASC 718 requires measurement of fair value at the grant date.

Fair market value must be determined using reliable methods. For private startups, this often means a 409A valuation or other third-party appraisal to establish the FMV of common stock. Using an improper FMV can lead to misstated expenses or non-compliant accounting.

Important inputs in valuation include strike price, expected term, volatility, dividend yield, risk-free interest rate, and probability of vesting (including forfeiture estimates).

ASC doesn’t mandate a specific option pricing model but expects you to justify your choice (e.g., Black-Scholes vs. lattice models). KPMG’s handbook confirms there's no preference for a specific valuation model under ASC 718.

Vesting Schedules

Time-based vesting is the most straightforward: you provide service over a fixed period (e.g., 4 years with a one-year cliff). Expense recognition follows the period during which the employee works.

Performance-based vesting attaches vesting to the achievement of specific goals (e.g., revenue, EBITDA, market share). Only when performance conditions are probable or likely to be satisfied does the expense begin. This can complicate estimates.

Hybrid vesting combines both (e.g., vesting only after time and performance thresholds). Hybrid schedules require tracking both axes, which impacts both measurement and recognition.

Forfeitures matter; you must estimate how many awards will be forfeited (e.g., when employees leave) and adjust recognized expense accordingly. You can either estimate forfeitures up front or recognize them as they occur, depending on your policy.

Expense Recognition

ASC 718 generally requires that the total grant-date fair value of an equity-classified award be recognized over the requisite service period (vesting period). For awards with graded vesting (e.g., portions vesting at different times), there are options:

• Recognize expense on a graded-vesting method, where each vesting tranche is expensed separately over its specific service period.
• Or use the modified graded-vesting approach (sometimes straight-line) where you average vesting times and spread expenses evenly. ASC allows either method, depending on which provides more meaningful information.

If performance or market conditions affect vesting, the expense recognition may be deferred or adjusted until those conditions become probable or are met.

Also, for liability-classified awards (when terms require cash or variable settlement), you must remeasure at each reporting date, adding volatility to the process.

Modification Accounting

A modification is any change in the terms or conditions of a stock-based award (e.g., repricing, change in vesting schedule, performance threshold) under ASC 718.

When a modification occurs, you must determine whether it triggers incremental compensation cost. If the modified award has greater fair value than the original at the modification date, the excess is recognized as additional expense.

For unvested awards, the incremental cost is spread over the remaining vesting period; for vested awards, it is often recognized immediately.

Also, even if a modification does not change measurable inputs (fair value, vesting conditions, classification), you must check if those inputs are the same immediately before and after the change to potentially avoid modification accounting.

Disclosure Requirements

ASC 718 requires solid disclosures to allow investors/readers of financials to understand the magnitude and timing of stock-based compensation expenses. The main disclosure items include:

• Total stock-based compensation cost recognized in the period.
• A description of the form(s) of the awards (options, RSUs, performance vs time-based).
• Number of awards granted, vested, forfeited, and outstanding. Strike/exercise prices, weighted average remaining life/term.
• Valuation methods used, assumptions (volatility, interest rates, expected term, discount for non-public status).
• Modification events during the period (e.g., repricing, changing vesting, cancellations) and incremental compensation cost recognized from those.
• If liability-classified awards exist: amount of liability, fair value at reporting dates, and how often revalued.
• Policies on forfeitures (how they are estimated or whether recognized as incurred).

ASC 718 vs. IFRS 2: What Global Startups Need to Know

The U.S. GAAP’s ASC 718 and the International Accounting Standards Board’s IFRS 2 govern how stock-based compensation is accounted for, disclosed, and reported.

The main similarities between them include the following.

Fair-Value Measurement at Grant Date

ASC 718 and IFRS 2 require stock-based or share-based payments to be measured at fair value as of the grant date when the award is made, not when vested. This fair value involves estimating volatility, expected term, risk-free rate, etc.

Expense Recognition Over the Vesting Period

Under both standards, the total expense of the award is recognized over the requisite service period (vesting period). That means even though employees might only vest after some time, the cost is accrued gradually.

Treatment of Equity- vs Cash-Settled Awards

Both require different award types:

• Equity-settled awards (e.g., stock options or RSUs), which involve the issuance of equity instruments
• Cash-settled awards, which are remeasured to fair value until settlement

Handling Market Conditions vs Performance or Service Conditions

ASC 718 and IFRS 2 require inclusion of market conditions (e.g., a condition tied to stock price) in the fair value at grant date, but performance or service conditions are handled in terms of how many shares are expected to vest (probability estimates) rather than remeasured.

The table below shows the differences between ASC 718 and IFRS 2:

Achieve ASC 718 Compliance Without Big Four Costs

Startups can stay fully compliant with ASC 718 without paying Big Four auditor fees by adopting a smarter, tech-driven approach. The most important thing is combining affordable 409A valuations, automated equity management tools, and specialized startup-focused accounting support.

Instead of relying on costly manual processes or oversized audit firms, startups can use Chore to centralize payroll, cap-table, and compliance workflows. This ensures accurate grant-date valuations, proper expense recognition, and audit-ready disclosures; all without the overhead of a large audit team.

Chore’s approach aligns with ASC 718 requirements by automating calculations, tracking vesting schedules, and generating GAAP-ready reports. Startups also gain the flexibility to integrate outsourced CFO expertise when needed, meaning they can scale compliance processes as they grow.

This reduces risk, preserves cash, and builds investor confidence by showing transparent, defensible financials. By maximizing Chore’s tools and services designed for startups, you can expense stock-based compensation accurately, keep investors satisfied, and stay ready for funding or M&A opportunities.

Ready to cut compliance costs without cutting corners? Schedule a free demo to discover how Chore can help you master ASC 718 compliance affordably.

FAQs

Do all startups need to comply with ASC 718?

Not all startups must comply with ASC 718 right away. Very early, bootstrapped companies without GAAP financials may not need it. But once a startup issues stock options or raises institutional funding, ASC 718 compliance becomes essential for transparent reporting, investor trust, and future audits or exits. Public companies and IPO-bound startups are always required to follow it.

How do I expense stock options under ASC 718?

Under ASC 718, stock options are expensed based on their grant-date fair value, measured using models like Black-Scholes or Monte Carlo. That total fair value is then recognized as compensation expense over the vesting period (straight-line or accelerated). Companies must:

• Measure fair value at grant date.
• Spread expense over vesting (e.g., 4 years equals 25% per year).
• Adjust for forfeitures if employees leave.
• Recalculate if options are modified (e.g., repriced).
• Record related tax effects.

Can ASC 718 compliance be done without a Big Four auditor?

Yes, startups do not need a Big Four auditor for ASC 718 compliance. Big Four firms are expensive and often unnecessary for early-stage companies. Specialized ASC 718 software (e.g., Carta, Ledgy, Shareworks) automates valuations, expense recognition, and reporting. Platforms like Chore provide expert compliance at a fraction of Big Four costs.