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Stock-Based Compensation | 12 Months Ended
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Dec. 31, 2022
Share-Based Payment Arrangement [Abstract] |
Stock-Based Compensation | Stock-Based Compensation In 2019, the Board of Directors adopted the Semrush Holdings, Inc. 2019 Stock Option and Grant Plan (the “2019 Plan”), which provides for the grant of qualified incentive stock options and nonqualified stock options or other awards, including restricted stock unit awards, to the Company’s employees, officers, directors, advisors, and outside consultants for the purchase of up to 8,682,600 shares of the Company’s common stock. In July 2020, the 2019 Plan was amended to provide for the grant of qualified incentive stock options and nonqualified stock options or other awards to the Company’s employees, officers, directors, advisors, and outside consultants for the purchase of up to 10,163,772 shares of the Company’s common stock. Stock options generally vest over a 4‑year period and expire 10 years from the date of grant. Certain options provide for accelerated vesting if there is a change in control (as defined in the 2019 Plan). The Semrush Holdings, Inc. 2021 Stock Option and Incentive Plan was adopted by the Board on March 3, 2021 and approved by stockholders on March 15, 2021 and became effective immediately prior to the effectiveness of the Company’s registration statement in connection with its IPO. The 2021 Plan replaced the 2019 Plan as the Board determined not to make additional awards under the 2019 Plan following the pricing of the Company’s IPO. The 2021 Plan allows the compensation committee of the Board to make equity-based and cash-based incentive awards to the Company’s officers, employees, directors and other key persons (including consultants). The Company initially reserved 13,503,001 shares of Class A common stock for the issuance of awards under the 2021 Plan. The 2021 Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning on January 1, 2022, by the lesser of 5% of the outstanding number of shares of Class A and Class B common stock on the immediately preceding December 31, or such lesser number of shares as determined by the compensation committee. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The Company accounts for stock-based compensation in accordance with the provisions of ASC 718 Compensation - Stock Compensation, which requires the recognition of expense related to the fair value of stock-based compensation awards in the statements of operations. For stock option awards issued under the Company’s stock-based compensation plans to employees and members of the Board for their services on the Board, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model as discussed further below. For restricted stock units (“RSUs”) granted subject to service-based vesting conditions, the fair value is determined based on the closing price of the Company’s Class A common stock, as reported on the New York Stock Exchange. RSUs granted subject to service-based vesting conditions generally vest over a four-year requisite service period. For all other service-based awards, the Company recognizes compensation expense on a straight-line basis over the requisite service period of the award with actual forfeitures recognized as they occur. Given the absence of an active market for the Company’s common stock prior to the completion of the IPO, the Board, the members of which the Company believes have extensive business, finance, and venture capital experience, were required to estimate the fair value of the Company’s common stock at the time of each grant of a stock-based award. The Company and the Board utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock. Each valuation methodology include s estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, in determining the value of the Company’s common stock at each grant date, including the following factors: (1) prices paid for the Company’s Preferred Stock, which the Company had sold to outside investors in arm’s-length transactions, and the rights, preferences, and privileges of the Company’s Preferred Stock and common stock; (2) valuations performed by an independent valuation specialist; (3) the Company’s stage of development and revenue growth; (4) the fact that the grants of stock-based awards involved illiquid securities in a private company; and (5) the likelihood of achieving a liquidity event for the common stock underlying the stock-based awards, such as an IPO or sale of the Company, given prevailing market conditions. The Company believes this methodology to be reasonable based upon the Company’s internal peer company analyses, and further supported by several arm’s-length transactions involving the Company’s Preferred Stock. Prior to the Company’s common stock being actively traded, the determination of fair value involved assumptions, judgments, and estimates. If different assumptions were made, stock-based compensation expense, consolidated net income (loss) and consolidated net income (loss) per share could have been significantly different. Following the closing of the Company’s IPO, fair value is determined based on the closing price of the Company’s Class A common stock, as reported on the New York Stock Exchange on the date of grant. The fair value of each option award was estimated on the date of grant using the Black-Scholes option-pricing model. As there was no public market for its common stock prior to March 25, 2021, which was the first day of trading, and as the trading history of the Company’s common stock was limited through December 31, 2022, the Company determined the expected volatility for options granted based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies. The expected life of options granted to employees was calculated using the simplified method, which represents the average of the contractual term of the option and the weighted-average vesting period of the option. The Company uses the simplified method because it does not have sufficient historical option exercise data to provide a reasonable basis upon which to estimate expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the share option. The Company has not paid, nor anticipates paying, cash dividends on its ordinary shares; therefore, the expected dividend yield is assumed to be zero. The weighted-average assumptions utilized to determine the fair value of options granted to employees are presented in the following table:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
Expected volatility | 53.3 | % |  | 52.1 | % |  | 51.0 | %
Weighted-average risk-free interest rate | 2.72 | % |  | 1.07 | % |  | 0.71 | %
Expected dividend yield | — |  |  | — |  |  | — |
Expected life – in years | 6 |  | 6 |  | 6
A summary of the Company’s option activity under 2021 Plan and the 2019 Plan as of December 31, 2022, and changes during the year then ended are as follows:
| Number of Options |  | Weighted-Average Exercise Price (per share) |  | Weighted-Average Remaining Contractual Term (in years)
Outstanding at December 31, 2021 | 6,329,822 |  |  | $ | 2.32 |  |  | 8.14
Granted | 1,841,178 |  |  | 11.99 |  |  |
Exercised | (681,860) |  |  | 1.44 |  |  |
Forfeited | (623,875) |  |  | 4.28 |  |  |
Outstanding at December 31, 2022 | 6,865,265 |  |  | 4.82 |  |  | 7.68
Options exercisable at December 31, 2022 | 4,162,946 |  |  | 1.72 |  | 7.02
The weighted-average grant-date fair value of options granted during the year s ended December 31, 2022, 2021, and 2020 was $6.36, $8.45, and $2.01 per share, respectively. No tax benefits were realized from options during the year ended December 31, 2022. The aggregate intrinsic value of options outstanding as of December 31, 2022 and 2021 was $32,721 and $117,734, respectively. The aggregate intrinsic value for options exercised during the year s ended December 31, 2022, 2021, and 2020 was $6,687, $26,151, and $566, respectively. The aggregate intrinsic value for options exercisable as of December 31, 2022 was $27,919. The aggregate intrinsic value was calculated based on the positive difference, if any, between the estimated fair value of the Company’s common stock on December 31, 2022 and 2021, respectively, or the date of exercise, as appropriate, and the exercise price of the underlying options. On July 28, 2020, the Company issued 156,852 shares of its restricted common stock (“Restricted Stock Issuance”) to the founders of Prowly for a total fair value of $291 under the 2019 Plan. This Restricted Stock Issuance vests over a three-year service period, applicable to both founders. As of December 31, 2022, 103,521 shares have vested in connection with this Restricted Stock Issuance. During the years ended December 31, 2022 and 2021, the Company granted to employees RSU awards for 1,181,782 and 239,936 shares of Class A common stock under the 2021 Plan, respectively. During the years ended December 31, 2022 and 2021 the Company recorded stock-based compensation expense related to the RSU grants of $3,295 and $440. The Company did not grant RSU awards during the year ended December 31, 2020. A summary of RSU activity under the Company’s 2021 Plan for the year ended December 31, 2022 is as follows:
|  | Number of Shares |  | Weighted-Average Grant Date Fair Value |  | Aggregate Fair Value
Unvested balance at January 1, 2022 |  | 239,936 |  |  | $ | 17.21 |  |  | $ | 4,129 |
Granted |  | 1,181,782 |  |  | 11.70 |  |  | 13,827 |
Vested |  | (77,182) |  |  | 16.01 |  |  | 1,236 |
Forfeited |  | (74,793) |  |  | 13.25 |  |  | 991 |
Unvested balance as of December 31, 2022 |  | 1,269,743 |  | $ | 11.97 |  |  | $ | 15,194 |
During the year ended December 31, 2022, the Company granted to employees performance stock units (“PSU”) awards for 1,395,596 shares of Class A common stock under the 2021 Plan. The Company did not grant PSU awards during the year ended December 31, 2021. The Company records stock-based compensation expense related to the PSU grants when it is probable that the underlying performance conditions will be recognized. During the year ended December 31, 2022, the Company granted two sets of PSU grants; executives and acquisition-related. The acquisition-related PSUs contained a market component. These awards were deemed probable of partial achievement by the Company during the year ended December 31, 2022. The executive grants were not probable of achievement as of December 31, 2022. During the year ended December 31, 2022, $148 of expense has been recognized in connection with a portion of the acquisition-related PSU awards, however, the remaining acquisition-related PSU awards were not probable of achievement as of December 31, 2022. For PSU grants that have only service and performance conditions, the Company measures these awards at the fair value of its class A common stock on the grant dates. For PSU grants that incorporate a market condition, only the market condition is reflected in the estimated fair value on the grant dates. The Company determined the fair value of the PSU awards using a binomial valuation method. A summary of PSU activity under the Company’s 2021 Plan for the year ended December 31, 2022 is as follows:
|  | Number of Shares |  | Weighted-Average Grant Date Fair Value |  | Aggregate Fair Value
Unvested balance at January 1, 2022 |  | — |  |  | $ | — |  |  | $ | — |
Granted |  | 1,395,596 |  |  | 11.18 |  |  | 15,603 |
Vested |  | — |  |  | — |  |  | — |
Forfeited |  | (111,976) |  |  | 11.05 |  |  | 1,237 |
Unvested balance at December 31, 2022 |  | 1,283,620 |  |  | $ | 11.22 |  |  | $ | 14,402 |
Compensation expense is based on the estimated value of the awards on the grant date, and is recognized over the period from the grant date through the expected vest dates of each vesting condition. The compensation expense attributable to the acquisition-based PSU awards was estimated based on a Monte Carlo simulation model, which applied the following key assumptions:
| For the Year Ended December 31, 2022
Risk-free interest rate | 2.07 | %
Volatility | 70.00 | %
Dividend Yield | — | %
Term (years) | 4.13
The Company has recorded stock-based compensation expense of $7,393, $2,742, and $1,079 during the years ended December 31, 2022, 2021, and 2020, respectively. The following table shows stock-based compensation expense by where the stock-based compensation expense is recorded by line item in the Company’s consolidated statement of operations:
| For the Year Ended December 31,
| 2022 |  | 2021 |  | 2020
Cost of revenue | $ | 74 |  |  | $ | 37 |  |  | $ | 18 |
Sales and marketing | 2,235 |  |  | 405 |  |  | 166 |
Research and development | 1,123 |  |  | 348 |  |  | 113 |
General and administrative | 3,961 |  |  | 1,952 |  |  | 782 |
Total stock-based compensation | $ | 7,393 |  |  | $ | 2,742 |  |  | $ | 1,079 |
As of December 31, 2022, there was $741 of unrecognized compensation cost related to unvested common stock option arrangements granted under the 2019 Plan, which is expected to be recognized over a weighted-average period of 1.34 years and $9,561 of unrecognized compensation cost related to unvested common stock option arrangements granted under the 2021 Plan, which is expected to be recognized over 3.27 years. As of December 31, 2022, there was $12,897 of unrecognized compensation cost related to unvested RSUs granted under the 2021 Plan, which is expected to be recognized over a weighted-average period of 3.14 years. As of December 31, 2022, the amount of unrecognized compensation cost related to unvested PSUs was not material. 2021 Employee Stock Purchase Plan The Semrush Holdings, Inc. 2021 Employee Stock Purchase Plan (the “ESPP”) was adopted by the Board on March 3, 2021 and approved by stockholders on March 15, 2021 and became effective immediately prior to the effectiveness of the Company’s registration statement in connection with its IPO. The ESPP initially reserves and authorizes the issuance of up to a total of 3,000,667 shares of Class A common stock to participating employees. The ESPP provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2022 and each January 1 thereafter through January 1, 2031, by the least of (i) 1% of the outstanding number of shares of Class A and Class B common stock on the immediately preceding December 31; (ii) 3,000,667 shares or (iii) such lesser number of shares of Class A common stock as determined by the ESPP administrator. The number of shares reserved under the ESPP is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The Company will continue to offer, sell and issue shares of common stock under the ESPP from time to time based on various factors and conditions, although the Company is under no obligation to sell any shares under the ESPP. The first service period of the ESPP began on September 1, 2021, the second service period of the ESPP began on March 1, 2022, and the third service period of the ESPP began on September 1, 2022. The Company recognized $204 and $133 in stock-based compensation expense related to these service periods for the years ended December 31, 2022 and 2021, respectively. On February 28, 2022, the Company issued 39,516 shares of its Class A common stock to its employees under its ESPP for the service period then ended. On August 31, 2022, the Company issued 25,240 shares of its Class A common stock to its employees under its ESPP for the service period then ended.

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