Share-based payment in fintech

What awards do fintech companies grant?

Early-stage fintechs typically grant share options; later-stage private fintechs often grant restricted stock units that vest after a period of service and, for private companies, only on a liquidity event such as an IPO or sale, because employees cannot otherwise sell the shares. Regulated fintechs, such as banks and payment institutions, may also have to defer part of variable pay and apply malus and clawback under regulatory remuneration rules. Crypto companies sometimes pay staff in their own tokens. The general rules for measuring and expensing awards are covered in share-based payment in tech; see also fintech accounting.

How is an IPO vesting condition treated under IFRS 2?

A condition that requires both service and an event such as an IPO is a non-market performance condition: it does not depend on the share price. It is not reflected in the grant-date fair value; instead, the company estimates how many awards are expected to vest, considering how likely and how soon the IPO is, and recognises the expense over the expected vesting period on that basis. The estimate is updated at each reporting date. If the IPO never happens and the awards lapse, the cumulative expense is reversed, because a vesting condition was not met.

Share-based payment in fintech: IPO-linked restricted stock units

A private fintech grants 1,000,000 restricted stock units with a grant-date fair value of US$ 10 each, 10,000 thousand in total. They vest after 4 years of service, but only if the company has listed by then. From the start, the company expects to list within the 4 years, and it lists at the end of year 3. All employees stay.

Under IFRS 2, the listing is expected, so the 10,000 thousand is spread over the 4-year vesting period, 2,500 thousand a year. Under US GAAP, a listing is not considered probable until it occurs, so nothing is expensed in years 1 and 2, the cumulative 7,500 thousand is recognised when the company lists in year 3, and 2,500 thousand follows in year 4. The total is the same, but US GAAP pushes the expense into the year of the IPO, often the year investors look at most closely.

How are a private fintech's shares valued?

Without a market price, the grant-date fair value of a private company's shares is estimated using recent funding rounds, adjusted for the different rights of preferred shares sold to investors and ordinary shares granted to staff, and for lack of marketability, along with income and market approaches. Secondary sales between investors and employees are evidence too, if they are orderly and not distressed. Option values also need expected volatility, usually taken from listed peers. In the US, valuations for tax under section 409A are often used as a starting point, but the accounting fair value must reflect all relevant evidence.

What happens when options are repriced after a down round?

When a fintech raises money at a lower valuation, staff options may be far out of the money, and companies often lower the exercise price. Under IFRS 2, a repricing is a modification that benefits employees: the company continues to recognise the original grant-date fair value, plus the incremental fair value, the difference between the fair value of the repriced option and of the original option at the modification date, over the remaining vesting period. For example, if an option's fair value rises from US$ 2.00 to 3.00 on repricing, the extra 1.00 per option is expensed over the remaining 2 years of vesting.

How are awards of crypto tokens accounted for?

IFRS 2 covers payments in the company's own equity instruments or in cash based on their value. A crypto token issued by a protocol or held by the company is usually not an equity instrument of the company, so awards settled in tokens are generally outside IFRS 2 and accounted for as employee benefits under IAS 19, measured by reference to the tokens the company must deliver, with the tokens themselves held as crypto assets. Where an award's value is linked to the company's own shares but settled in tokens, it may be a cash-settled share-based payment. The terms decide, and the judgement should be disclosed. See crypto assets.

How are deferral, malus and clawback treated?

Regulated fintechs subject to remuneration rules may have to pay part of bonuses in shares, defer them for several years and reduce or recover them if misconduct or losses come to light. Deferred share awards that require continued service are expensed over the deferral period. Malus, which reduces awards before they vest, is usually treated as a condition that can reduce the number of awards expected to vest; clawback of amounts already paid is recognised when the company becomes entitled to recover them.

How does US GAAP differ?

ASC 718 treats an IPO or change in control as a performance condition that is not probable until it occurs, which produces the catch-up shown above. It also allows a policy of straight-line recognition for awards with graded vesting and only service conditions, and accounting for forfeitures as they occur, neither of which IFRS 2 allows. Employer payroll taxes on awards are recognised when the awards vest or are exercised. See share-based payment in tech.

This guide is general information. It is not tax or legal advice for your situation.