The exit that keeps moving
Updated: 10 hours ago
If share options vest only on a sale or IPO, when does the start-up start recognising an expense, and over what period?
Corlea Robotics Ltd is a Dublin start-up. On 1 January 2025 it grants its five-person leadership team 200,000 share options. There is no time-based vesting: the options vest only if the company is sold or listed, and only for holders still employed at that point. The grant-date fair value is €1.50 an option, so the scheme is worth €300,000.
Nobody knows when, or whether, an exit will happen. IFRS 2 still requires the €300,000 to be recognised over the period the leadership team works for it. The question is which period, and the answer changes every year.
What kind of condition is an exit?
IFRS 2 treats conditions very differently depending on what they are, so start with the scheme rules.
What the scheme says | Type of condition | What it means for the expense |
Vests on a sale or IPO, but only if the holder is still employed then | Non-market performance condition, with an implied service condition | Not in the fair value. Expense depends on whether an exit is expected; vesting period re-estimated; reversed if no exit (IFRS 2.15(b), 19–20) |
Vests on a sale or IPO only if the price per share exceeds a target | Market condition (as well as the exit and service) | The price target is built into the grant-date fair value. Missing the price target alone does not reverse the expense (IFRS 2.21) |
Vests on a sale or IPO whether or not the holder still works there | No service condition: the exit is a non-vesting condition | No vesting period to spread over: the fair value, reflecting the exit condition, is expensed at grant (IFRS 2.14, 21A) |
Most start-up schemes, like Corlea's, fall in the first row: a holder who leaves before the exit loses the options. The rest of this post deals with that case. Read the leaver clause carefully, though. A scheme that lets good leavers keep their options until an exit is a different animal, and so is one where the payout depends on the exit price.
The rules for a moving vesting period
IFRS 2.15(b) was written for exactly this situation. When options depend on a performance condition and continued employment until it is met, and the length of the vesting period depends on when the condition is met, the company:
presumes the services will be received over the expected vesting period;
estimates the length of that period at grant date, based on the most likely outcome of the condition; and
for a non-market condition such as an exit, revises the estimate whenever later information shows the period will be different.
At the same time, the expense is based on the number of options expected to vest, and that number is revised at each reporting date (IFRS 2.19–20). For an all-or-nothing exit condition, the best estimate is usually all or nothing as well. If no exit is expected, the number expected to vest is nil and there is no expense. If an exit is expected, the expense is spread from the grant date to the expected exit date, with a catch-up for the years already served.
If the options never vest because no exit happens, the cumulative expense ends at zero (IFRS 2.19). The grant-date fair value is never remeasured.
Corlea's numbers
31 December 2025. The company is still raising money. There is no plan to sell or list, and the board cannot point to any likely exit date. Best estimate of options expected to vest: nil. Expense: nil. The scheme is still disclosed.
31 December 2026. After a strong year the board appoints corporate finance advisers, and a sale is expected by the end of 2027. The expected vesting period is now 36 months from grant, of which 24 have passed. Cumulative expense is €300,000 × 24/36 = €200,000, all recognised in 2026 as a catch-up.
31 December 2027. Due diligence takes longer than planned and completion is now expected on 30 June 2028. The vesting period stretches to 42 months, with 36 served. Cumulative expense is €300,000 × 36/42 = €257,143, so the 2027 expense is €57,143. Pushing the date out does not reverse anything: it spreads the remaining cost over a longer period.
30 June 2028. The sale completes, the options vest, and the remaining €42,857 is recognised.
Reporting date | Exit expected? | Expected exit date | Months served / expected vesting period | Cumulative expense (€) | Expense for the year (€) |
31 Dec 2025 | No | – | – | – | – |
31 Dec 2026 | Yes | 31 Dec 2027 | 24 / 36 | 200,000 | 200,000 |
31 Dec 2027 | Yes | 30 Jun 2028 | 36 / 42 | 257,143 | 57,143 |
30 Jun 2028 (sale completes) | Vested | – | 42 / 42 | 300,000 | 42,857 |
Had the buyer walked away in March 2028, with no other exit in sight, Corlea would have reversed the cumulative €257,143 in 2028. That reversal is not a correction of an error: the earlier estimates were reasonable on the information then available.
When is an exit "expected"?
This is the judgement that drives everything. IFRS 2 talks about best estimates and the most likely outcome; it sets no probability threshold. In practice the question is whether an exit is more likely than not, and by roughly when. Evidence that points to yes:
a board decision to pursue a sale or listing, minuted;
corporate finance advisers or IPO advisers engaged;
an approach or term sheet from a credible buyer;
IPO readiness work, such as a reporting upgrade or a new board structure, under way; and
investors whose fund life requires an exit within a known window.
General optimism, a pitch deck saying "exit in five years" or a sector full of acquisitions does not get there on its own. Equally, a company cannot avoid the expense by refusing to make an estimate when the evidence is there. Once an exit is expected, there is no reason to wait until the deal is signed: by then most of the vesting period has passed and the catch-up lands in a single year.
Other points start-ups miss
Leavers. A leader who leaves before the exit forfeits the options. Their cumulative expense is reversed, because the service condition was not met.
Grant date. For an unlisted company the grant date is when the company and the holder have a shared understanding of the terms, often after board or shareholder approval. If people start working for the options before that date, the expense starts earlier, using an estimate of the fair value (IFRS 2.IG4).
Fair value of an unlisted share. The share price in Black-Scholes usually comes from the most recent funding round, adjusted for the preferences investors hold that ordinary shareholders do not. Volatility comes from comparable listed companies. Keep the evidence.
Cash on exit. If the scheme rules or past practice mean the company, rather than the buyer, will settle the options in cash on exit, the awards may be cash-settled. Cash-settled awards are remeasured at fair value at each reporting date, which changes the whole picture.
Deferred tax. Where a tax deduction is expected on exercise, deferred tax follows the intrinsic value, with any excess over the cumulative expense taken to equity (IAS 12.68A–68C). Our Deferred tax template covers the calculation.
Earnings per share. If you present EPS, options that vest only on a future exit are contingently issuable shares and are usually left out of diluted EPS until the exit happens (IAS 33.48 and 33.52). The EPS Calculator handles the dilution.
What to disclose
IFRS 2.45 requires a description of each arrangement, including the vesting conditions, and a table of options outstanding, granted, forfeited, exercised and expired, with weighted average exercise prices. IFRS 2.47 asks how fair value was measured, and IFRS 2.51 the expense for the period. For an exit-only scheme, also explain the judgement: whether an exit was considered expected at the reporting date, the expected date used, and how sensitive the expense is to it. For Corlea at 31 December 2025, that means saying clearly that no expense was recognised because no exit was expected, and what the unrecognised cost is.
The Disclosure Review tool checks the note, and The Tipping Point helps document the exit judgement.
The audit angle
Auditors look for consistency between the share-based payment estimate and everything else the company says. A start-up telling investors it expects a sale next year, while its accounts say no exit is expected, has a problem. They read board minutes and adviser engagement letters, check the grant date and the fair value inputs, recompute the catch-up, and confirm that leavers' expense was reversed. The timing of the first expense is a classic area for management bias in either direction, so expect it to be treated as a key judgement under ISA 540.
Our Audit Risk Matrix and Audit Procedure Builder help plan the work on share-based payments.
In short
Classify the exit condition first: with continued employment it is usually a non-market performance condition; a price target is a market condition; no service requirement makes it a non-vesting condition.
For a non-market exit condition, there is no expense while no exit is expected. Once one is, expense from the grant date to the expected exit date, with a catch-up.
Re-estimate the exit date at every reporting date. A later date spreads the cost; a cancelled exit reverses it.
Never remeasure the grant-date fair value, and disclose the judgement and its sensitivity.
Template
Our Share option expense template is built for start-ups and other unlisted companies with an option scheme. It values each grant with Black-Scholes, spreads the cost for up to 20 grants, including options that vest only on an exit, using your exit estimate at each year end, deals with leavers, exercises and lapses, and gives the expense, the budget for the next years, the option movement table, the share-based payment reserve, the journals and draft wording for the IFRS 2 note. Its worked example, Tarnwick Labs Ltd, includes a leadership grant that vests only on a sale or listing.
The IFRS 2 Share-based Payment note in the Learning Hub covers vesting conditions, measurement and modifications, with practice questions.
Corlea Robotics Ltd is fictional. References are to IFRS 2 Share-based Payment, IAS 12 Income Taxes and IAS 33 Earnings per Share. Companies reporting under FRS 102 apply Section 26, which follows the same approach to vesting conditions.
