System1, Inc.SST
System1, Inc. Stock Compensation Disclosure
Stock-Based Compensation
We are authorized to issue and/or grant restricted stock, restricted stock units, stock options, stock appreciation rights, and other stock-based and cash-based awards under our 2022 Incentive Award Plan ("2022 Plan"). During the year ended December 31, 2024, 1.1 million grant awards were reserved and authorized for issuance and/or grant under the 2022 Plan. In addition, the number of underlying shares authorized for issuance/grant under the 2022 Plan are subject to increase each year on January 1, equal to the lesser of (a) a number of shares equal to 2.5% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by the compensation committee of the board of directors. On January 1, 2025, the number of shares authorized and reserved for grant under the 2022 Plan was increased by 2.3 million shares in accordance with the foregoing provision of the 2022 Plan.
As described in Note 2, Summary of Significant Accounting Policies, the Replacement Awards continue to vest over the original vesting schedule of the original underlying awards. We recognized stock-based compensation expense for the Replacement Awards of $2.2 million and $6.6 million during the years ended December 31, 2024 and 2023, respectively. The unrecognized stock-based compensation expense associated with these unvested Replacement Awards was $0.2 million as of December 31, 2024, expected to be recognized during the first quarter of 2025.
We recorded the following stock-based compensation expenses for equity-classified awards (in thousands):
| For the Year Ended | |||||||||||
| 2024 | 2023 | ||||||||||
| Stock-based compensation expense | $ | 15,763 | $ | 21,235 | |||||||
The following summarizes RSU activity:
| Shares (in thousands) | Weighted-Average Grant Date Fair Value per Share | ||||||||||
| Unvested as of December 31, 2023 | 4,423 | $ | 5.41 | ||||||||
| Granted | 6,135 | $ | 1.42 | ||||||||
| Vested | (4,089) | $ | 4.55 | ||||||||
| Forfeited | (544) | $ | 3.14 | ||||||||
| Unvested as of December 31, 2024 | 5,925 | $ | 2.08 | ||||||||
The weighted average grant date fair value per share for the restricted stock units granted during the year ended December 31, 2023 was $3.04. The weighted average grant date fair value per share for the 3.1 million restricted stock units vested during the year ended December 31, 2023 was $8.99.
At December 31, 2024, we had unrecognized stock-based compensation relating to restricted stock units of approximately $9.3 million, which is expected to be recognized over a weighted-average period of 0.9 years.
Stock Appreciation Rights
During the year ended December 31, 2024, we adopted the 2024 SAR Plan. The maximum number of Class A common stock that may be issued pursuant to awards of Stock Appreciation Rights ("SARs") granted under the 2024 Plan ("Awards") is 23.8 million shares.
Financial performance in the 2024 Plan is determined by the achievement of Adjusted EBITDA performance targets, defined as, with respect to any particular period, our net income (loss) before interest expense,
income taxes, depreciation and amortization expense, stock-based compensation expenses, dividends or other distributions to equity holders, expense associated with revaluation of any warrants, costs associated with acquisitions or dispositions, deferred compensation, management fees, minority interest expense, restructuring charges, impairment and certain segment-specific adjustments, and such other adjustments as may be appropriate to accurately reflect performance, in each case, as determined by the 2024 Plan administrator.
In July 2024, we granted 22.4 million SARs. Each Award is subject to the employee's continued service through the applicable vesting date (as defined in the SAR Plan). The term of any SARs shall not exceed seven years. The SARs will vest in four equal tranches upon achieving trailing twelve month Adjusted EBITDA targets of $50.0 million, $60.0 million, $70.0 million, and $80.0 million.
Upon exercise, the SARs will be settled in shares of our Class A common stock or in cash at our election. The probability that the award will vest for each of the four tranches will be assessed at the end of every reporting period. If and when the award is deemed probable of vesting, we will recognize stock-based compensation expense for the award on a graded basis through the date of vesting for each individual tranche. Unvested SARs are forfeited upon termination of service.
We use the Black-Scholes option pricing model to estimate the grant date fair value of each SARs award granted under the 2024 Plan. The expected term is estimated using the simplified method, which is the midpoint between the vesting date and the contractual term. Volatility is based on a blend of the historical volatility of our common stock and the peer-leveraged volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The following table sets forth the key assumptions used to determine the fair value:
| Input | ||||||||
| Risk-free interest rate | 4.01% - 4.56% | |||||||
| Term (in years) | 2.5 - 7.0 | |||||||
| Volatility factor | 73.18% - 89.76% | |||||||
| Dividend yield | 0.00% | |||||||
The weighted-average grant date fair value of SARs granted during the year ended December 31, 2024 was $0.94.
A summary of our SARs activity is as follows:
| Number of Shares (in thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
| Outstanding at January 1, 2024 | — | $ | — | — | $ | — | |||||||||||||||||
| Granted | 22,446 | 1.44 | |||||||||||||||||||||
| Forfeited/canceled | (498) | 1.44 | |||||||||||||||||||||
Outstanding at December 31, 2024 | 21,948 | 1.44 | 5 | ||||||||||||||||||||
Expected to vest as of December 31, 2024 | — | $ | 1.44 | 5 | $ | — | |||||||||||||||||
As of December 31, 2024, we determined the performance conditions of the Tranche I SARs awards were probable of being achieved before the fourth anniversary date of the awards. Accordingly, we recognized $0.9 million in stock-based compensation expense within equity for the twelve months ended December 31, 2024. As of December 31, 2024, the total unrecognized compensation cost related to unvested SARs was $3.5 million, expected
to be recognized over the remaining period of two years. No SARs vested or were exercised for the year ended December 31, 2024.
About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.