What Is ASC 718 and Why Does It Matter?
ASC 718 is the accounting standard that requires companies to recognize the fair value of stock-based compensation as an expense over the requisite service period, (usually the vesting period).
Equity may be non-cash, but the accounting impact is real. Stock compensation expense affects net income, EBITDA, and investor perception of financial performance.
ASC 718 compliance matters because:
- Auditors scrutinize equity accounting closely
- Investors evaluate dilution and expense accuracy
- Errors can trigger audit adjustments or restatements
- Inaccurate expense recognition distorts GAAP financials
- Weak equity controls raise governance concerns
For startups preparing for fundraising, audit, or eventual exit, equity accounting should be reliable.
When Do Startups Need ASC 718 Compliance?
ASC 718 becomes important earlier than many founders expect.
Common inflection points include:
- Raising Series A or Series B
- Scaling headcount rapidly
- Issuing significant option grants to executives or technical hires
- Completing a 409A valuation
- Preparing for a financial statement audit
- Transitioning from cash-basis bookkeeping to GAAP reporting
If you are issuing equity and preparing GAAP financials, ASC 718 is already relevant.
Common ASC 718 Challenges for Startups
Implementation
ASC 718 takes time, experience, and tools along with judgment and assumptions to implement correctly. It is one of the more complex accounting standards.
Forfeiture Estimates and Volatility
These are two of the inputs needed that can involve sensitive assumptions that can cause variation in the expense and involve judgment.
Misalignment Between 409A and Expense Recognition
A 409A valuation determines the fair value of common stock for option grants. ASC 718 governs how that value is expensed. Confusion between the two often leads to reporting errors.
Inaccurate or Incomplete Cap Table Data
Equity accounting depends on clean cap table records. If grant data, vesting terms, or modifications are inconsistent, expense calculations may be incorrect.
Modifications, Repricing, and Extended Exercise Windows
Changes to award terms can trigger incremental expense under ASC 718. These events require careful technical analysis.
Rapid Hiring and High Grant Volume
High-growth startups, including SaaS and AI companies, may issue large volumes of equity awards. Without structured tracking processes, errors compound quickly.
Incorrect Vesting Schedule Calculations
Cliff vesting, graded vesting, and performance-based awards require precise amortization. Manual tracking increases the risk of misstatement.
Late Discovery During Audit
Many startups uncover ASC 718 issues during their first audit, leading to adjustments, delays, and extra scrutiny from investors.
How Burkland Supports ASC 718 Compliance
Burkland helps venture-backed startups design disciplined, scalable stock compensation accounting processes.
Our support includes:
- ASC 718 policy development
- Coordination with 409A valuation providers
- Equity award expense calculations (including using software platforms such as Carta, Shareworks, Pulley, etc.)
- Cap table reconciliation and integration
- Analysis of modifications and repricing events
- Audit preparation and documentation and support
- Ongoing monitoring as equity plans evolve
We ensure stock compensation expense is calculated accurately and defensible under investor and auditor review.
What Strong Equity Accounting Looks Like
Startups with mature ASC 718 compliance typically have:
- Documented stock compensation accounting policies
- Clean, reconciled cap table data
- Accurate and automated amortization schedules
- Proper treatment of forfeitures and modifications
- Timely monthly expense recognition
- Organized audit-ready documentation
There are no surprises when auditors review equity expense reports.
How ASC 718 Impacts Fundraising, Audit, and Exit
Equity accounting directly affects financial transparency and governance credibility. Strong ASC 718 compliance:
- Reduces audit adjustments and delays
- Prevents earnings volatility caused by corrections
- Increases investor confidence in GAAP reporting
- Supports clean quality-of-earnings analysis
- Strengthens IPO readiness foundations
Equity misstatements can raise concerns about internal controls and financial discipline.