Investment in Unity China

12 Months Ended

Dec. 31, 2022

In August 2022, we formed a company in China ("Unity China") to perform research and development activities and to facilitate commercialization in the Greater China region. Upon formation, we agreed to sell to third-party investors an ownership interest of approximately 20.5% in Unity China for cash consideration of $196.5 million. Under the agreement and pursuant to certain conditions that include successfully completing an initial public offering of Unity China at a valuation greater than $3.6 billion, the investors have the option to require us to repurchase their interest at a redemption value based on the greater of Unity China's then current equity fair value or a guaranteed floor value in the aggregate amount of $278.0 million. The redeemable noncontrolling interests are initially measured at its issuance date fair value and then adjusted for its proportionate net income or loss and accreted to its estimated redemption value through the applicable redemption date, which is August 2027. We valued the combination of the investors' equity interest in Unity China and their redemption right at approximately $217.9 million. The investors' equity interest was valued using a discounted cash flow analysis and market approach. The redemption right was valued using the Black-Scholes option-pricing model adjusted for probabilities of successfully completing an initial public offering. The difference between the fair value of the redeemable noncontrolling interests and cash consideration received was recognized as a customer incentive, as the equity interest holders are also customers. The customer incentive will be amortized against revenue over the five-year term of the redemption right.

Subsequent and contingent to the initial investment from third-party investors, a management investor contributed $14.4 million for an ownership interest of 1.5% with no redemption rights.

The results of Unity China are included in our consolidated financial statements and were not material for the year ended December 31, 2022, and the redeemable noncontrolling interests are recorded as temporary equity on our consolidated balance sheet.

The following table presents the changes in redeemable noncontrolling interests (in thousands):


	December 31, 2022
Balance at beginning of period	$	—
Initial fair value measurement of investors' equity interest and redemption right	217,900
Net loss attributable to redeemable noncontrolling interests	(1,207)

Adjustments for redeemable noncontrolling interests	2,870
Balance at end of period	$	219,563