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Equity-Based Compensation
 12 Months Ended
Dec. 31, 2022
Share-Based Payment Arrangement [Abstract]  
Equity-Based Compensation Equity-Based Compensation
Fair Value Considerations

Determining the fair value of awards requires judgment. The Monte Carlo simulation and Black-Scholes models were used to estimate the fair value of awards that have service, performance and/or market vesting conditions. The assumptions used in these models require the input of subjective assumptions as follows:
Fair value—The fair value of the common stock underlying the incentive units was determined by the Company’s board of directors (the “Board”). Because there was no public market for the incentive units, the Company’s Board determined the common stock fair value at the incentive unit grant date by considering several objective and subjective factors, including the price paid for its common and preferred stock, actual and forecasted operating and financial performance, market conditions and performance of comparable publicly traded companies, developments and milestones within the Company, the rights, preferences, and privileges of its common and preferred stock, and the likelihood of achieving a liquidity event. The fair value of the common stock underlying stock options, restricted stock units and performance stock units was determined by the closing stock price on the New York Stock Exchange.

Expected volatility—Expected volatility was based on historical volatilities of a publicly-traded peer group based on weekly price observations over a period equivalent to the expected term of the award.

Expected term—For awards with only service vesting conditions, the expected term was determined using the simplified method, which estimates the expected term using the contractual life of the award and the vesting period. For awards with performance or market conditions, the term was estimated in consideration of the time period expected to achieve the performance or market condition, the contractual term of the award, and estimates of future exercise behavior.

Risk-free interest rate—The risk-free interest rate was based on the U.S. Treasury yield of treasury bonds with a maturity that approximates the expected term of the award.

Expected dividend yield—The dividend yield was based on the Company’s expectations of dividend payouts. The Company has never declared or paid any cash dividends on its common stock, and the Company does not anticipate paying any cash dividends in the foreseeable future.

DLOM estimate—The discounts for lack of marketability were used to help calculate the value of closely held and restricted shares. A valuation discount exists between a share that is publicly traded, and thus has a market, and the market for privately held stock, which often has little, if any, marketplace.

Forfeiture rate—The Company recognizes forfeitures as they occur instead of estimating forfeitures based on historical activity.

Summary of Equity-Based Compensation

The table below summarizes equity-based compensation expense recognized by award type:
SUCCESSORINTERMEDIATE SUCCESSOR
Year Ended December 31,October 9, 2020 through December 31, 2020January 1, 2020 through October 8, 2020
20222021
Incentive units$13,616 $6,646 $— $— 
Restricted stock units3,626 553 — — 
Stock options657 130 — — 
Performance stock units628 — — — 
Employee stock purchases71 — — — 
Total equity-based compensation$18,598 $7,329 $— $— 

The following table summarizes the Company’s total unrecognized equity-based compensation as of December 31, 2022:
Unrecognized Equity-Based Compensation
Incentive units$12,195 
Restricted stock units15,301 
Stock options3,538 
Performance stock units4,371 
Total unrecognized equity-based compensation
$35,405 

Excess tax benefits (detriments) related to equity-based compensation were $(1.6) million in 2022, with no corresponding amount in 2021.

Incentive Units

Prior to the IPO, certain employees of the Company purchased incentive units in Solo Stove Holdings, LLC for $0.000001 per unit. The majority of the incentive units were issued in December 2020 with additional issuances in January and March 2021. The Company used the Monte Carlo simulation model to determine the fair value of the incentive units. Each incentive award consists of service-based units (representing one-third (1/3) of the number of incentive units) and performance-based units (representing two-thirds (2/3) of the number of incentive units).
The incentive units with a service condition are scheduled to vest over four years with 25% vesting on the one-year anniversary of the grant date and the remaining 75% of such service-based units vesting in substantially equal monthly installments over the following three years, subject to the employee’s continued employment through each applicable vesting date. Additionally, the vesting of the service-based units will accelerate upon the occurrence of a sale transaction prior to the employee’s termination of employment. The IPO did not meet the definition of a sale transaction per the incentive unit agreement. Therefore, the vesting of the service-based units did not accelerate upon the IPO, nor did the vesting schedule change.

There were 27.6 million incentive units outstanding immediately before the Reorganization Transactions. After the Reorganization Transactions, the 27.6 million incentive units converted into 3.4 million common units in Holdings. The 3.4 million common units consist of service-based units representing one-third (1/3) of the common units and performance-based units representing two-thirds (2/3) of the common units.

In connection with the IPO, 0.9 million of the 2.3 million performance-based common units vested with the remaining 1.4 million unvested performance-based common units being canceled. Associated with these vested units, the Company recognized $3.3 million of stock compensation expense during the fourth quarter of fiscal year 2021.

At IPO, the 1.4 million performance-based incentive units that did not vest were replaced with service-based common units in Holdings that vest over two years, with 50% of units vesting after one year and 50% vesting in four quarterly installments in the following year, subject to the employee’s continued employment with the Company through the applicable vesting date. If Summit Partners sells all of its equity interests in the Company or if the investment return to Summit equals or exceeds 4.0x on a per-share basis for four consecutive quarters, and in each case the employee remains employed with the Company on such date, then all unvested service-based common units that were previously performance-based incentive units will vest. For accounting purposes, these awards were considered new awards with an estimated fair value of $25.8 million. Pursuant to the Stockholders Agreement, dated October 27, 2021 by and among the Company and the stockholders party thereto, holders of common units cannot exercise vested service-based common units until such time as Summit Partners and its affiliates cease to own any of the shares of Holdings common stock owned by them at IPO, Summit Partners does a follow-on registered offering in which case holders can perform an equivalent transaction, or the Stockholders Agreement is otherwise terminated in accordance with its terms.

The grant date fair value of each incentive unit incorporates a range of assumptions for inputs as follows:
2020
Expected term (years)4.0
Expected stock price volatility36.0 %
Risk-free interest rate0.3 %
Expected dividend yield— 
DLOM estimate16.0 %
Weighted average fair value at grant date$0.25
A summary of the incentive and common units is as follows for the periods indicated (in thousands, except per share data):

Outstanding Incentive Units
Outstanding Common Units
Weighted Average Grant Date Fair Value Per Unit
Weighted Average Remaining Contractual Term (Years)
Aggregate Intrinsic Value
Unvested, December 31, 2020
24,551—$0.253.00$6,220
Granted prior to Reorganization Transactions3,730—0.451,663
Forfeited/cancelled prior to Reorganization Transactions(723)— 0.25 (183)
Effect of Reorganization Transactions(1)
(27,558)3,408——
Cancellation of unvested performance units in connection with the IPO(2)
—(1,359)——
Grant of replacement awards in connection with the IPO(3)
—1,35918.9525,754
Vested in connection with the IPO(4)
—(913)1.47(1,342)
Vested subsequent to Reorganization Transactions—(257)3.84(988)
Unvested, December 31, 2021
—2,238$13.912.11$31,124
Granted————
Forfeited/canceled—(66)15.02(987)
Vested—(979)14.79(14,482)
Unvested, December 31, 2022
—1,193$13.120.00$15,655
Exercisable, December 31, 2022(5)
——$—$—
(1) Represents the conversion of incentive units into common units of Holdings. The aggregate intrinsic value did not change after the conversion.
(2) Represents the performance-based units that did not vest upon IPO because Summit Partners did not achieve a return of 4.0x as described above.
(3) Represents the replacement awards that were granted for the performance-based units that did not vest upon IPO. Refer to the amended incentive unit terms described above.
(4) Represents the performance-based units that vested upon IPO.
(5) Note there were performance and service-based units that vested by December 31, 2022. However, none of them are exercisable due to the Stockholders Agreement, as described above.

The total fair value of incentive units vested and converted into shares during 2022 and 2021 was $14.5 million and $2.3 million, respectively.

Incentive Award Plan

In October 2021, the Board adopted, and the stockholders of the Company approved, the 2021 Incentive Award Plan (“Incentive Award Plan”), which became effective on October 28, 2021. Upon the Incentive Award Plan becoming effective, there were 10,789,561 shares of Class A common stock authorized under the Incentive Award Plan. The shares of Class A common stock authorized under the Incentive Award Plan will increase annually, beginning on January 1, 2023 and continuing through 2031, by the lesser of (i) 5% of the then outstanding common stock, or (ii) a smaller amount as agreed by the Board.

Stock Options

Upon IPO, the Company granted stock options under the Incentive Award Plan. Stock options provide for the purchase of shares of the Company’s Class A common stock in the future at an exercise price set on the grant date. Unless otherwise determined by the plan administrator and except for certain substitute options granted in connection with a corporate transaction, the stock option's exercise price will not be less than 100% of the fair market value of the underlying share on the date of grant. The options vest over four years, with 25% vesting on the first anniversary of the grant date and the remainder vesting in substantially equal quarterly installments over the following three years, subject to the employee’s continued employment with the Company through the applicable vesting date.
The following summary sets forth the stock option activity under the Incentive Award Plan (in thousands, except per share data):

Number of Stock OptionsWeighted-Average Grant Date Fair ValueWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Term (Years)
Aggregate Intrinsic Value (1)
Unvested, December 31, 2020
— $— $— —$— 
Granted340 8.71 17.00 
Forfeited or expired— — — 
Vested and converted to shares— — — 
Unvested, December 31, 2021
340 $8.71 $17.00 9.83$— 
Granted502 2.72 5.07 
Forfeited or expired(93)8.71 17.00 
Vested and converted to shares(62)8.71 17.00 
Unvested, December 31, 2022
687 $4.34 $8.29 4.98$— 
Exercisable, December 31, 2022
62 $8.71 $17.00 — $— 
(1) The aggregate intrinsic value is zero because the closing Class A common stock price at the end of the fiscal year is less than the weighted-average exercise price of the options.

The fair value of each option was estimated at the grant date using the Black-Scholes method with the following assumptions:

Fiscal Year Ended December 31,
20222021
Risk-free interest rate
2.7% - 3.1%
1.6 %
Expiration (in years)1010
Expected volatility
40.5% - 40.7%
37.0 %

Restricted Stock Units

Upon and after the IPO, the Company granted restricted stock units (“RSUs”) under the Incentive Award Plan. The RSUs are unfunded, unsecured rights to receive, on the applicable settlement date, shares of our Class A common stock or an amount in cash or other consideration determined by the plan administrator to be of equal value as of such settlement date. The RSUs will vest over four years, with 25% vesting on the first anniversary of the grant date and the remainder vesting in substantially equal quarterly installments over the following three years, subject to the employee’s continued employment with the Company through the applicable vesting date.

The following table summarizes the activity related to the Company’s restricted stock units:
Restricted Stock Units Outstanding
Number of AwardsWeighted-Average Grant Date Fair Value
Outstanding, December 31, 2020
— $— 
Granted661 19.05 
Vested and converted to shares— — 
Forfeited/canceled— — 
Outstanding, December 31, 2021
661 $19.05 
Granted1,457 2.94 
Vested and converted to shares(151)19.02 
Forfeited/canceled(184)17.52 
Outstanding, December 31, 2022
1,784 $6.05 

The total fair value of RSUs vested and converted into shares during 2022 was $2.9 million.
Performance Stock Units

In October 2022, the Company granted performance stock units (“PSUs”) under the Incentive Award Plan. The PSUs are unfunded, unsecured rights to receive, if the Company achieves an internally-derived performance target, shares of our Class A common stock or an amount in cash of equal fair market value of a share on the day immediately preceding the settlement date. The PSUs will vest at the conclusion of a fiscal quarter that begins at any time within a two year period after January 1, 2023, if the Company’s internally-derived performance target is met during a fiscal quarter and subject to the employee’s continued employment with the Company through the applicable vesting date. If the Company’s internally-derived performance target is not achieved within the two year vesting period, the PSUs will automatically forfeit.

The following table summarizes the activity related to the Company’s performance stock units:
Performance Stock Units Outstanding
Number of AwardsWeighted-Average Grant Date Fair Value
Outstanding, December 31, 2021
— $— 
Granted1,296 3.86 
Vested and converted to shares— — 
Forfeited/canceled— — 
Outstanding, December 31, 2022
1,296 $3.86 

Employee Stock Purchase Plan

In October 2021, the Board adopted, and the stockholders of the Company approved, the 2021 Employee Stock Purchase Plan (the “ESPP”). The maximum number of shares of common stock which will be authorized for sale under the ESPP is equal to the sum of (a) 1,618,434 shares of common stock and (b) an annual increase on the first day of each fiscal year beginning in 2023 and ending in 2031, equal to the lesser of (i) 0.5% of the shares of the Company’s common stock outstanding on the last day of the immediately preceding fiscal year and (ii) such number of shares of common stock as determined by the Board; provided, however, no more than 6,473,736 shares of common stock may be issued under or transferred pursuant to rights granted under Section 423 Component (as defined within the ESPP) of the ESPP (which numbers may be adjusted pursuant to the ESPP). As of December 31, 2022, awards with respect to 102,616 shares of Class A common stock have been issued under the ESPP.