The Financial Reporting Blog

After the markets closed on September 18th, Chinese technology giant Alibaba priced the shares for its long-awaited IPO at $68 per share, higher than the previously expected range of between $60 and $66 per share. When measuring the fair value of equity-based compensation granted prior to an IPO, should the expected IPO price range or even the actual IPO price be indicative of the fair value of the shares at the time of the grant? Alibaba’s Form F-1/A dated September 15, 2014 notes that the company issued both options and restricted stock units up through September 5th. According to the company, the fair value of Alibaba’s ordinary shares was $59.00 for the most recent grant.

Equity-based compensation (stocks, options, or something more exotic) is a useful tool for firms to hire and retain employees. Through shared ownership, such remuneration is commonly thought to align the incentives of employees, firms and other shareholders. In the case of startups, equity-based compensation can be particularly effective as it allows younger firms to conserve cash and obtain a greater degree of employee buy-in while competing effectively with much larger, established entities to acquire talent. Equity based compensation is attractive also because of the flexibility in structuring pay – human resources personnel and compensation experts are able to continually tinker terms and conditions to tailor awards to promote short, medium or long term goals of firms.