16. Stock-based Compensation

Equity incentive plans

On October 22, 2019, the Board of Directors approved the Waystar Holding Corp. 2019 Stock Incentive Plan (“2019 Waystar Holding Plan”). Under this plan, we can issue up to 9.9 million options or other equity awards. The granted awards contain service criteria, performance criteria, market conditions, or a combination thereof for vesting and have a 10-year contractual term. Options with a service condition generally vest over 5 years with 20% vesting in equal vesting installments. Options with a performance condition and a market condition vest based upon a change in control, initial public offering, or a sponsor distribution or deemed return if the investors have achieved specified levels of return on investment. In addition, as part of a change in control in 2019, 3.4 million fully vested rollover options remain outstanding.

The Board of Directors approved the Waystar Holding Corp. 2024 Equity Incentive Plan (the “2024 Equity Incentive Plan”), effective as of June 6, 2024, the date of pricing of our IPO. Under this plan, we can issue non-qualified stock options, incentive stock options, stock appreciation rights, restricted shares of the Company’s Common Stock, restricted stock units, and other equity-based awards tied to the value of the Company’s shares. Under this plan, we can issue up to 10 million options and other equity awards. The number of shares available to be issued automatically increases on the first day of each fiscal year beginning next year by a number of shares equal to the lesser of the positive difference, if any, between 5% of the outstanding common stock on the last day of the immediately preceding fiscal year, minus the plan share reserve on the last day of the immediately preceding fiscal year or such lesser number of shares as may be determined by the Board of Directors. Options with a service condition generally vest over 5 years with 20% vesting in equal vesting installments. The restricted stock units (“RSUs”) under the 2024 Equity Incentive Plan generally vest over 4 or 5 years with 25% or 20% vesting, respectively, in equal vesting installments. As of September 30, 2024, 4.7 million shares were available for future grants under the plan.

The Board of Directors approved the Waystar Holding Corp. 2024 Employee Stock Purchase Plan (the “ESPP”), effective as of June 6, 2024, the date of pricing of our IPO. A total of 3,250,000 shares of common stock are initially reserved for the ESPP. The number of shares available to be issued for the ESPP will automatically increase each fiscal year beginning next year by a number of shares equal to the lesser of the positive difference, if any, between 1% of the outstanding common stock on the last day of the immediately preceding fiscal year and the number of shares of common stock available for the issuance of shares pursuant to the plan on the last day of the immediately preceding fiscal year or such lesser number of shares as may be determined by the Board of Directors. The number of shares available to be issued for the ESPP will not exceed 27,000,000 as outlined in the plan agreement. As of September 30, 2024, the ESPP has not been made available to employees and no shares have been issued.

Stock Options

We utilize the Black-Scholes option pricing model to estimate the fair value of the service condition options under all plans and the Monte Carlo pricing model to estimate the fair value of the performance condition options under the 2019 Waystar Holding Corp. Plan. We value both types of options at the grant date using the following assumptions:

The weighted average grant date fair value of options granted during the three months ended September 30, 2023 was $20.63 per share. No options were granted during the three months ended September 30, 2024. The weighted average grant date fair value of options granted during the nine months ended September 30, 2024 and 2023 was $12.89 and $19.88 per share, respectively. As of September 30, 2024, we had 7.0 million fully vested options with a weighted average exercise price of $11.47 per share, an aggregate intrinsic value of $116.2 million and an average remaining contractual term of 4.3 years. The total fair value of options vested for the three months ended September 30, 2024 and 2023 were $2.9 million and $2.6 million, respectively. The total fair value of options vested for the nine months ended September 30, 2024 and 2023 were $4.8 million and $4.0 million, respectively.

In June 2024, we determined the vesting of all our performance condition options became probable as a result of the IPO (see Note 1). Therefore, we recognized an additional $33.1 million of stock-based compensation for the nine months ended September 30, 2024 as the implicit service period for the awards established at the grant date had elapsed. As of September 30, 2024, there is no remaining unrecognized compensation expense related to the performance condition options issued under the 2019 Waystar Holding Corp. Plan.

Information pertaining to option activity under all plans (including rollover options) during the nine months ending September 30, 2024 and 2023 is as follows:

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The following is a summary of the significant assumptions used in estimating the fair value of options granted the three and nine months ended September 30, 2024 and 2023:

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The aggregate intrinsic value of options exercised (the difference between the fair market value of our stock on the date of exercise and the exercise price) was approximately $6.7 million and $0.0 million for the three months ended September 30, 2024 and 2023, respectively, and $6.7 million and $0.6 million for the nine months ended September 30, 2024 and 2023, respectively.

We expect to incur compensation expense of approximately $56.5 million over a weighted average of 3.9 years for all unvested time-based awards outstanding on September 30, 2024.

RSUs

The RSUs granted on June 10, 2024 in conjunction with the IPO were valued at the IPO price. Subsequent RSU grants will be valued using our common stock price as of the grant date based on the publicly traded value per NASDAQ, and are expensed on a straight-line basis over the applicable vesting period. All vesting is contingent on continued service.

The following table summarizes RSU activity during the nine months ended September 30, 2024. There was no RSU activity prior to the initial grant of RSUs on June 10, 2024.

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We expect to incur compensation expense of $39.9 million over a weighted average of 4.3 years for all unvested RSUs outstanding on September 30, 2024.

Stock-based Compensation

We recorded $7.9 million and $2.2 million of stock-based compensation expense for the three months ended September 30, 2024 and 2023, respectively, and $47.4 million and $6.5 million for the nine months ended September 30, 2024 and 2023, respectively.

Stock-based compensation expense was recorded in the following cost and expense categories in the consolidated statements of operations:

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