In January 2014, the Arhaus, LLC 2014 Equity Plan was established which allowed for the granting of Class C and D incentive units to employees. In June 2017, the Board adopted the 2017 Equity Plan, which allowed for the granting of Class F/F-1 incentive units to employees and in May 2021, the 2017 LLC Agreement and 2017 Equity Plan were amended to allow for the granting of Class G incentive units.

In May, June and July 2021, the Company granted a total of 701,965 Class G incentive units that vest over a five year term. The Class C, D, F and F-1 incentive units vest over three to five years. All holders of the Incentive Units become fully vested in the event of a change in control, death or disability, as long as the holder of the unit is employed by the Company on the date of such event. Further, certain Class G incentive unit holders who are terminated without cause will have their unvested units fully vest upon that event.

The Incentive Units represent interests that share only in proceeds from defined capital transactions above specified participation thresholds. Upon the Incentive Unit holder’s termination of employment, all unvested units are forfeited, and the Company has the right to purchase all vested units at a per unit price equal to the fair market value of a unit determined at the date such right is exercised by an independent appraisal firm to be mutually agreed to by the Company and the unit holder; provided however, all vested and unvested units are forfeited without compensation in the event of termination for cause.

The grant-date fair value of the Class C, D and F/F-1 incentive units is determined through use of the Black-Scholes option pricing model. The key assumptions used for the January 31, 2019 and September 30, 2019 Class F/F-1 incentive unit grants within the Black-Scholes model were as follows:

The Company’s valuation of the Class G incentive units granted in May, June and July 2021 were measured using the probability-weighted expected return model (“PWERM”). The PWERM is a scenario-based methodology that estimates the fair value of the Incentive Units awarded based upon an analysis of future values for the Company. The Company considered two different scenarios: (a) remain private and (b) IPO. Under the remain private scenario, as of June 30, 2021, the Company estimated the enterprise value by weighting the guideline public company method and the discounted cash flow method, and then relied on the option pricing model and applied a discount for lack of marketability. The option pricing model estimated the value using the Black-Scholes option pricing model.

The expected term represents our expected time until a liquidity event, as of the valuation date. The volatility assumption is based on an identified group of comparable public companies over a similar term. The risk-free rate of return is based on the yields of U.S. Treasury securities with maturities similar to the expected term. We used an expected divided yield of zero, as we do not plan to pay cash dividends for the foreseeable future.

Additionally, a probability distribution of possible future equity values is completed and incorporated into the calculation of respective unit fair values. This is necessary as upon the occurrence of a liquidity event in the future, the proceeds thereof will be allocated in accordance with the distribution waterfall defined within the amended 2017 LLC Agreement.


	Incentive Units
	Class C			Class D			Class F/F-1			Class G
	Units	Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value (1)		Units	Weighted Average Grant Date Fair Value
December 31, 2019	1,868,913	$	0.57	96,318	$	0.83	4,984,390	$	0.63	—	$	—
Purchased	—			—			(36,638)	0.36		—
Forfeited	—			—			(566,722)	0.61		—
December 31, 2020	1,868,913	0.57		96,318	0.83		4,381,030	0.63		—	—
Granted										701,965	18.10
Forfeited	—			—			(109,916)	0.77
November 7, 2021	1,868,913	$	0.57	96,318	$	0.83	4,271,114	$	0.63	701,965	$	18.10

In connection with the Reorganization, the Incentive Unit holders contributed their units of LLC to Arhaus, Inc. in exchange for shares of Class A or Class B common stock for their vested Incentive Units and Class A or Class B restricted stock for their unvested Incentive Units (collectively referred to as the "Exchanged Stock"). The Exchanged Stock's fair value was equal to the respective Incentive Units’ fair market value prior to the Reorganization, which was in accordance with the distribution waterfall defined in the 2017 LLC Agreement. The vesting requirements for the exchanged Class A and Class B restricted stock (collectively the "Restricted Stock") did not change from the original Incentive Unit terms. The exchange of the Exchanged Stock was accounted for as a Type I (probable-to-probable) modification in accordance with ASC 718, Stock Based Compensation, in which no incremental fair value was determined to have been given to the Incentive Unit holders.


	Common Stock						Restricted Stock
	Class A			Class B			Class A			Class B
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
November 8, 2021	—	—		—	—		—	—		—	—
Issued	5,836,278	$	16.28	6,148,146	$	0.13	2,520,227	$	16.28	596,598	$	0.13
December 31, 2021	5,836,278	$	16.28	6,148,146	$	0.13	2,520,227	$	16.28	596,598	$	0.13

In November 2021, the 2021 Equity Plan was adopted by the Board of Directors which allows for the granting of nonqualified stock options, incentive stock options, stock appreciation rights or SARs, restricted stock, restricted stock units or RSUs, performance shares, performance share units, and other awards. As of December 31, 2021, the Company has not granted any awards to employees under the 2021 Equity Plan.

The shares of the Incentive Units and Restricted Stock time vest and are accounted for as equity awards in which the fair value of the award is determined at the grant-date. The Company has recorded compensation expense of $1.8 million, $0.4 million

and $0.3 million at December 31, 2021, 2020 and 2019, respectively, within the selling, general and administrative expenses line item of the consolidated statements of comprehensive income. Total unrecognized compensation cost to be recognized in future periods was $11.6 million at December 31, 2021, and will be recognized over a weighted average period of 4.31 years. The total grant-date fair value of units vested during the years ended December 31, 2021 and 2020, was $0.3 million and $0.4 million, respectively.

In December 2021, Reed, a related party, transferred 421,350 shares of Class B common stock, which were automatically converted upon transfer to shares of Class A common stock to certain long-tenured employees of the Company, which was treated as an equity award. The transferred shares of Class A common stock do not have any vesting requirements. As a result of the transfer and awarding of the Class A common stock to employees, the Company recorded $4.6 million of compensation expense at December 31, 2021, within the selling, general and administrative expenses line item of the consolidated statements of comprehensive income. Further, Reed contributed $2.8 million to the Company in relation to the tax withholding obligations of the Company and those long tenured employees. The contribution was recorded as withholding expense within the selling, general and administrative expenses line item of the consolidated statements of comprehensive income.

In accordance with the change in reporting entity, the Company’s consolidated financial statements include a deferred compensation liability related to a former employee of Homeworks. The current portion of the deferred compensation liability is included within accrued other expenses on the consolidated balance sheets for $1.1 million at December 31, 2020. The non-current portion of the deferred compensation liability is recorded within other long-term liabilities on the consolidated balance sheets for $3.9 million at December 31, 2020, respectively. At the time of the Reorganization, Reed assumed the remaining deferred compensation liability which resulted in a capital contribution to additional paid-in-capital for $3.9 million at December 31, 2021.