Table of Contents
Vitae Pharmaceuticals, Inc.
Notes to the Financial Statements (Continued)
For the Years Ended December 31, 2013 and 2012
2. Summary of Significant Accounting Policies and Basis of Accounting (Continued)
estimates to be materially different from amounts actually incurred, the Company's understanding of the status and timing of services performed relative to the actual status and timing of services
performed may vary and may result in reporting amounts that are too high or too low in any particular period.
Preferred Stock Warrants
Freestanding warrants that are related to the purchase of redeemable preferred stock are classified as liabilities and recorded at fair
value regardless of the timing of the redemption feature or the redemption price or the likelihood of redemption. The warrants are subject to re-measurement at each balance sheet date and any change
in fair value is recognized as a component of other income in the Statements of Operations. Pursuant to the terms of these warrants, upon the conversion to common stock of the series of preferred
stock underlying the warrant, the warrants automatically become exercisable for shares of common stock based upon the conversion ratio of the underlying preferred stock. In addition, in the event of a
change in control of the Company in which the sole consideration is cash, upon the written request of the Company, the outstanding Series C and Series D warrants shall automatically
terminate immediately prior to the consummation of such change in control. All of the warrants contain a cashless exercise feature that allows the warrant to be automatically exercised prior to its
termination or expiration if the current fair market value of a share of the series and/or class of the Company's capital stock for which such warrant is exercisable is greater than such warrant's per
share exercise price. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants. The fair value of the preferred stock
warrants are classified as Level 3 measurements (see Note 5).
Stock-Based Compensation Expense
The Company accounts for stock-based compensation expense in accordance with the provisions of ASC 718, CompensationStock Compensation, which addresses the accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of or may be settled by the issuance of the enterprise's
equity instruments. ASC 718 requires that an entity measure the cost of equity-based service awards based on the grant-date fair value of the award and recognize the cost of such awards over the
period during which the employee is required to provide service in exchange for the award (the vesting period).
stock options issued to employees and members of the Board for their services on the Board, the Company estimates the grant date fair value of each option using the Black-Scholes
option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common
stock over a period consistent with the expected life of the option, risk-free interest rates, the value of the common stock and expected dividend yields of the common stock. For awards subject to
service-based vesting conditions, the Company recognizes stock-based compensation expense, net of estimated forfeitures, equal to the grant date fair value of stock options on a straight-line basis
over the requisite service period, which is generally the vesting term. For awards subject to both performance and service-based vesting conditions, the Company recognizes stock-based compensation
expense using the straight-line recognition method when it is probable that the performance condition will be achieved. Forfeitures are required to be estimated at the