Stock-Based Compensation Expense (ASC 718) Explained for Founders
Collated by Aparna Devalla, CPA
Curated by Rubric Financial
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Why SBC Matters
- ASC 718 requires companies to recognize STOCK-BASED COMPENSATION as a real expense on the income statement, even though no cash leaves the bank.
- For early-stage startups, SBC is typically $200K-$2M/year. Material on the P&L; can be 20-50% of total operating expenses for engineering-heavy companies.
- Founders rarely budget for this number. Boards always ask about it. Auditors test it heavily.
- Why GAAP requires it: equity compensation IS a real economic cost: the company is giving up ownership stake worth X dollars in exchange for services. GAAP captures that.
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