Afterpay has been issuing deep in-the-money options to "staff, directors, and consultants" as it seeks to turbocharge its growth in the United States.

Options are considered ''in-the-money'' if they allow the holder to purchase shares at below the current trading price.

However, the cheap options can be highly dilutionary to existing investors while clouding the ability for analysts to determine their current and future ownership.

The ASX-listed Afterpay cannot own less than 90 per cent of Afterpay Inc, suggesting that only a few more options would be issued, the spokeswoman confirmed.

Despite this confirmation that the dilution will be limited, the company is still withholding the total number of shares currently on issue in Afterpay Inc.

Afterpay previously has disclosed it has a 100 per cent equity interest in Afterpay Inc, but also that it has been issuing options over the US business as part of the incentive plan.

A funding deal with US venture fund Matrix Partners will also result in the further issue of as many as 21.7 million ASX-listed Afterpay shares.

Under the ESOP, 10.03 million options have been issued, of which an estimated 7.6 million have been converted to shares but "are still subject to vesting", based on subsequent filings. Afterpay also said there were an additional 615,740 shares on issue that had vested.


'We want people to feel heavily invested in our business.' — Afterpay CEO Nick Molnar

However, there is insufficient disclosure to determine how much of Afterpay Inc these options and shares represent, given the company will not disclose the total share count.

Those options, which have been issued at US19¢ (about 25¢) effectively value the US business at a maximum $40 million, based on US filings that show the share count cannot exceed 150 million.

That is significantly lower than the multibillion-dollar valuation assigned to the US business by Australian sharemarket investors, and illustrates the beneficial terms extended to its US staff, consultants and directors.

Afterpay chief executive Nick Molnar defended the ESOP in a recent interview with AFR Weekend.

He said the structure was the brainchild of Dana Stalder, the general partner of Matrix Partners, the venture capital fund that has invested in Afterpay via convertible notes.

"It's not traditional for a US venture capital fund to put money into an Australian-listed business at a $1 billion-plus market cap, and it wasn't that we needed access to the money, because we were public and could have done a raise," Mr Molnar said.

"It was all about how do we set up the right structure to bring the best talent in the world into our business."


Mr Molnar said there was a lot of negative sentiment among Australian investors that had seen companies fail in their efforts to expand offshore, so Afterpay set up a separate US company.

"We want people to feel heavily invested in our business. So we set up a structure with Dana that let us bring people in out of Google, AirBnb, Harvard and Stanford MBA students," he said.

The Matrix notes can convert to a maximum of 21.7 million ASX-listed Afterpay shares from January 2023, with the conversation ratio based on the future value of Afterpay Inc.

US staff, directors and consultants can also be issued with as many as 21.7 million more ASX-listed shares at conversion, based on the same conversion ratio.

The use of options to pay for staff and services can be controversial as it can overstate earnings if operational expenses are effectively paid for in shares and options.

In fact, Afterpay's use of "share-based payments" was raised as a key audit matter by the company's accountants because "unidentifiable services" were provided by Matrix Partners, which owns the convertible notes, while options were issued to US employees and consultants.

These payments were difficult to value, given Afterpay US was a private company, while the future conversion value was uncertain.

Mr Molnar said the US market was hyper-competitive and potential recruits had abundant opportunities.

"They felt like they had the scale benefit of what we built, but it was also the upside benefit of saying if we create success jointly together, we should jointly share in the upside and success."