# ZIPRECRUITER, INC. (ZIP) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ZIPRECRUITER, INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1617553/000161755322000012/zip-20211231.htm
Accession: 0001617553-22-000012
Filing date: 2022-03-03
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ZIP/
All MD&A years: /company/ZIP/mda/
Next year: /company/ZIP/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and the related notes included in Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the sections titled “Risk Factors” and “Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

OVERVIEW

Our Mission is to actively connect people to their next great opportunity.

ZipRecruiter is a two-sided marketplace for work. We generate substantially all of our revenue from fees paid by employers to post jobs and access other features in our marketplace. We offer our employers flat rate pricing on terms typically ranging from a day to a year, or performance-based pricing, such as cost-per-click, to align with each employer’s hiring needs.

ZipRecruiter is free to use for job seekers. Job seekers come to ZipRecruiter in search of their next opportunity. After establishing a profile, job seekers are able to apply to jobs with a single click. Our automated recruiter curates jobs and proactively sends alerts for new opportunities where they are a Great Match, which is a designation assigned by ZipRecruiter’s technology to indicate a high potential fit between a job seeker and a job. As our matching technology learns more about job seekers’ preferences and attributes, our technology offers increasingly higher quality matches.

We plan to continue to invest aggressively in our marketplace to drive growth for the foreseeable future. We have made significant investments in our business to expand our employer and job seeker footprints, increase their engagement and enhance our datasets and machine learning.

For the year ended December 31, 2021, our revenue was $741.1 million and we generated net income of $3.6 million and Adjusted EBITDA of $108.3 million. For the year ended December 31, 2020, our revenue was $418.1 million, and we generated net income of $86.0 million and Adjusted EBITDA of $80.1 million. Adjusted EBITDA is a financial measure not presented in accordance with GAAP. For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure and a reconciliation of net income (loss) to Adjusted EBITDA, see the section titled “Key Operating Metrics and Non-GAAP Financial Measures.”

46

KEY OPERATING METRICS AND NON-GAAP FINANCIAL MEASURES

In addition to the measures presented in our consolidated financial statements, we use the following key operating metrics and non-GAAP financial measures to identify trends affecting our business, formulate business plans, and make strategic decisions:

[[GREPCENT_TABLE]]
[["","March 31, 2020","","June 30, 2020","","September 30, 2020","","December 31, 2020","","March 31, 2021","","June 30, 2021","September 30, 2021","","December 31, 2021"],["Quarterly Paid Employers","98,456","","76,867","","89,810","","89,636","","114,705","","169,191","169,535","","147,081"],["Revenue per Paid Employer","$1,151","","$1,140","","$1,145","","$1,276","","$1,093","","$1,081","$1,254","","$1,497"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2021","","2020"],["","","","","","(in thousands, except percentages)"],["Adjusted EBITDA","","","","","$","108,329","","","$","80,133"],["Adjusted EBITDA margin","","","","","15","%","","19","%"]]
[[/GREPCENT_TABLE]]

Quarterly Paid Employers

We quantify the revenue-generating customer base as the number of Paid Employers in our marketplace. The Quarterly Paid Employer metric includes all actively recruiting employers (or entities acting on behalf of employers) on a paying subscription plan or performance marketing campaign for at least one day in a given calendar quarter. Paid Employers excludes employers from our third-party sites or other indirect channels, employers who are not actively recruiting and employers on free-trials. This group of employers excluded from our Paid Employer count does not contribute a significant amount of revenue.

In the year ended December 31, 2021, Quarterly Paid Employers increased when compared to the year ended December 31, 2020. The elevated levels of hiring activity we saw throughout the year ended December 31, 2021 were driven by the strong demand from U.S. employers entering and returning to our marketplace, and a robust and recovering economy. The longstanding investments in building our brand among employers and sales and marketing efforts contributed to a record number of Paid Employers participating in our marketplace during 2021.

Revenue per Paid Employer

We evaluate Revenue per Paid Employer as a key indicator of our efforts to increase value provided to employers in our marketplace. We define Revenue per Paid Employer as total company revenue in a given period divided by Quarterly Paid Employers in the same period.

In the year ended December 31, 2021, Revenue per Paid Employer increased by 17% when compared to the year ended December 31, 2020. We experienced a large influx of new and reactivated Paid Employers during the first and second quarters of 2021. Periods in which we have a large influx of new and reactivated Paid Employers generally result in downward pressure on Revenue per Paid Employer as these Paid Employers only contribute revenue for a portion of such a quarter. As these Paid Employers use our marketplace and see positive results, many will choose to list more job postings in our marketplace. Paid Employers also increasingly use enhancement products and services to increase their job postings’ visibility and reach, generating additional revenue for ZipRecruiter.

47

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as our net income (loss) before total other (income) expense, net, income tax expense (benefit), and depreciation and amortization, adjusted to eliminate stock-based compensation expense. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA for a period by revenue for the same period.

We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors and other interested parties to evaluate and assess performance. Adjusted EBITDA is not intended to be a substitute for any U.S. GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry.

Our Adjusted EBITDA and Adjusted EBITDA margin fluctuate from quarter to quarter depending on a variety of factors including, but not limited to, our investments in research and development, sales and marketing, headcount and our ability to generate revenue.

The following table presents a reconciliation of net income to Adjusted EBITDA for each of the periods indicated:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2021","","2020"],["","","","","","(in thousands)"],["GAAP net income (1)","","","","","$","3,600","","","$","86,048"],["Stock-based compensation","","","","","107,258","","","5,752"],["Depreciation and amortization","","","","","9,463","","","9,949"],["Total other expense, net","","","","","884","","","95"],["Income tax benefit","","","","","(12,876)","","","(21,711)"],["Adjusted EBITDA","","","","","$","108,329","","","$","80,133"]]
[[/GREPCENT_TABLE]]

____________

(1)GAAP net income includes one-time general and administrative expenses related to financial advisory services, accounting and legal expenses, the bonus earned by our Chief Executive Officer, and other filing costs in connection with the direct listing of our Class A common stock on the New York Stock Exchange, or Direct Listing, totaling $34.0 million and $0 in the years ended December 31, 2021 and 2020, respectively.

48

The following tables present GAAP net income margin and Adjusted EBITDA margin for each of the periods indicated:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2021","","2020"],["","","","","","(in thousands, except percentages)"],["Revenue","","","","","$","741,141","","","$","418,142"],["Net income","","","","","3,600","","","86,048"],["GAAP net income margin","","","","","\u2014","%","","21","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2021","","2020"],["","","","","","(in thousands, except percentages)"],["Revenue","","","","","$","741,141","","","$","418,142"],["Adjusted EBITDA","","","","","108,329","","","80,133"],["Adjusted EBITDA margin","","","","","15","%","","19","%"]]
[[/GREPCENT_TABLE]]

FACTORS AFFECTING OUR PERFORMANCE

We believe that the growth and future success of our business depends on many factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth, improve our results of operations and maintain or increase profitability.

Attract More Employers

Our ability to maintain and grow an expansive universe of employers and job opportunities in our marketplace is critical to our business’s future. We acquire new employers primarily through marketing programs and our sales teams.

Our ability to cost effectively attract both employers and job seekers is critical to our success. Given that our marketplace remains free for job seekers, employers’ spending funds our continued investment in matching technology. The majority of our marketing efforts to date have been toward reaching employers. Our investment over the last several years in employer-specific marketing has driven a significant increase in brand awareness. Our aided brand awareness among employers has grown to over 80% as of January 2022. We believe scaling our brand has a positive impact on our ability to attract both employers and job seekers to our marketplace. We plan to continue to invest in the sales and marketing channels that we believe will drive further brand awareness and preference amongst both employers and job seekers. We are focused on the effectiveness of our sales and marketing spend and will continue to be disciplined in how we measure and re-invest in growing both sides of our marketplace.

Most of the employers in our marketplace use our self-serve tools to gain access to our marketplace and do not require a salesperson to help them initially onboard and begin using ZipRecruiter. Other employers have more sophisticated needs or require greater assistance from our sales team. As a result, despite our expectation that our sales team will continue to use technology to become more efficient over time, we expect to grow our sales team significantly over several years in order to be able to cover every business that requires individualized assistance with their hiring needs.

Create More Value for Employers

While our marketplace serves a wide variety of employers, all employers benefit from finding the right candidate quickly. We actively measure when an employer rates a Great Match candidate with a “thumbs

49

up” as a means of monitoring our matching quality. Despite a tight labor market, we delivered 55% more Great Match applications who received a “thumbs up” from employers in the year ended December 31, 2021 compared to the year ended December 31, 2020.

Average Monthly Revenue per Paid Employer by Employer Cohort Start Year

Satisfied employers continue to expand their relationship with us in terms of additional jobs and tenure in our marketplace. Those with recurring hiring needs remain active in our marketplace over time and tend to increase their spend each year, posting additional jobs and purchasing job enhancement products. We saw increased Revenue per Paid Employer across every annual Cohort (Paid Employers acquired during a particular year) in 2021. For example, Average Monthly Revenue per Paid Employer in our 2020 Cohort grew from $378 to nearly $800, an 111% increase compared to the prior year.

Additionally, we have seen an increase in Year 1 Average Monthly Revenue per Paid Employer in each calendar year shown above, which we believe is attributable to improvements in our marketplace over the years and our customers willing to spend more with us. Year 1 Average Monthly Revenue per Paid Employer among our 2021 Cohort is nearly 4 times that of the 2015 Cohort.

Attract More Job Seekers

For job seekers, we operate like a personal recruiter, presenting potential candidates to employers before they have applied. Phil, our AI-powered personal recruiter, engages job seekers on their journey and provides technology that makes their job search and application process more efficient. Our ability to cost effectively grow the number of job seekers and increase their engagement in our marketplace is critical to strengthen our marketplace. We compete for job seekers on many fronts, including our ability to surface unique and attractive jobs, our ability to simplify the hiring process, the transparent feedback job seekers receive on the status of their applications and our trusted brand. We believe our offering to job seekers compares favorably versus alternatives due to the combination of our large and unique set of jobs to choose from, plus our proven matching technology that continues to get smarter over time. In 2021 alone we engaged with over 35 million Active Job Seekers. Historically, we have largely focused our marketing spend on employers, and despite being the highest rated job seeker app on iOS and Android3, we are not yet the most well-known. In 2021, we began investing in media campaigns focused on job seeker acquisition and engagement. We are focused on becoming top of mind for job seekers by increasing our brand awareness.

3 Based on job seeker app ratings, Jan 2021 to Jan 2022 from AppFollow for ZipRecruiter, CareerBuilder, Glassdoor, Indeed, LinkedIn, and Monster.

50

We will continue to invest in growing the number of job seekers in our marketplace that are either actively or passively open to evaluating new opportunities through a variety of acquisition strategies.

Investments in Technology

The technology that drives high quality matches between our job seekers and employers remains a significant investment priority. We are continuously improving our data science models, leveraging the billions of interactions taking place in our marketplace to drive meaningful improvements in the quality of matches we share with our users. Our continued improvement of the technology underpinning our marketplace and product experience is paramount to our user experience, driving our ability to attract and retain employers and job seekers, improve the rate at which we make Great Matches and generate revenue. As such, we will continue to invest in our technology to continue to evolve our marketplace to provide improved experiences and impact for both employers and job seekers.

We have invested in research and development to improve our matching technology and deliver a high-quality experience to employers and job seekers. In 2021 and 2020, we spent $110.5 million and $69.4 million, or 15% and 17% of total revenue, respectively, on research and development. We believe the return on these investments will create operating leverage over time while continuing to drive top-line growth.

Seasonality

Our business is seasonal, reflecting typical behavior in hiring markets. Hiring activity tends to decelerate in the fourth quarter. In 2019, for example, sequential revenue growth was 13% and 4% for the quarters ended June 30 and September 30, respectively. Sequential growth decelerated to 0% in the quarter ended December 31, 2019.

The COVID-19 pandemic interrupted the patterns we typically see in our quarterly seasonality. In 2020, we experienced a decrease in sequential revenue of 23% in the quarter ended June 30, 2020 as a result of the pandemic, but saw consecutive quarters of revenue growth of 17% and 11% in the third and fourth quarters of 2020, respectively, as employers started to return to and join our marketplace. In 2021, we saw sequential revenue growth in each quarter. However, growth from third to fourth quarter decelerated to 4%, reflecting more typical seasonal patterns.

Impact of COVID-19

COVID-19 has had, and continues to have, a significant impact on the U.S. economy and hiring. The economic recovery during the twelve months of 2021 has driven a significant and broadly distributed increase in demand for labor. In the year ended December 31, 2021, we delivered $741.1 million in revenue, a 77% increase compared to the year ended December 31, 2020, reflecting strong execution across product, marketing and operations, and the continuation of an economic recovery. We saw employers in our marketplace increase by 64% in the quarter ended December 31, 2021 versus the quarter ended December 31, 2020 as macroeconomic conditions improved and we increased our sales and marketing investments to aid in bringing on more Paid Employers.

Components of Our Results of Operations

Revenue

We generate revenue primarily from fees paid by employers to post and distribute jobs in our marketplace, as well as multiple sites managed by Job Distribution Partners, which are third-party sites who have a relationship with us and advertise from our marketplace, and include job boards, newspaper classifieds, search engines, social networks, talent communities and resume services.

51

Our subscription revenue consists of time-based job posting plans, upsells which complement or expand visibility and prominence to job posting plans and resume database plans.

We offer job posting plans with terms typically ranging from a day to a year on a flat rate subscription basis to access our marketplace, where customers may create and manage job postings and review incoming candidate applications. We recognize revenue ratably over the subscription period beginning on the date the subscription service is made available to the customer. Our nonrefundable subscriptions are typically subject to renewal at the end of the subscription term.

Our upsell services complement or expand visibility to job posting plans and are typically sold on a subscription basis. Upsell services revenue is recognized ratably over the term of the agreement beginning on the date the upsell services are made available to the customer. Additionally, upsell services include job posting enhancements which are applied to individual job postings to provide customers with a temporary boost in the prominence of their job postings. Revenue from job posting enhancements is recognized as the customer uses the enhancements on its job postings.

Resume database plans allow our customers to search and view resumes and revenue is recognized ratably over the subscription period.

Performance-based revenue is recognized when a candidate clicks on or applies to a job distributed by ZipRecruiter on behalf of a customer. For performance-based revenue, our customers pay an amount per click or per job application usually capped at a contractual maximum per job recruitment campaign.

For a description of our revenue accounting policies, see the section titled “Critical Accounting Policies and Estimates” below.

Cost of Revenue and Gross Profit

Cost of Revenue

Cost of revenue consists of third-party hosting, credit card processing fees, personnel related costs (including salaries, bonuses, benefits, and stock-based compensation) for customer support employees, partner revenue share amounts, job distribution costs from performance-based revenue, and amortization of capitalized software costs associated with our marketplace technology to provide services for our customers. In addition, we allocate a portion of overhead costs, such as rent, IT costs, supplies and depreciation and amortization, to cost of revenue based on headcount.

We expect cost of revenue to increase in absolute dollars in future periods due to payment processing fees, third-party hosting fees, personnel related costs to support additional transaction volume, and amortization expense associated with our capitalized internal-use software and development cost. Our cost of revenue may fluctuate in absolute dollars from period to period based on the amount and timing of all of these items.

Gross Profit and Gross Margin

Our gross profit and gross margin may fluctuate from period to period. Such fluctuations may be influenced by our revenue, timing and amount of investments to expand hosting capacity, our continued investments in our support teams, and the amortization expense associated with our capitalized internal-use software and development cost.

Costs and Operating Expenses

Sales and Marketing

Sales and marketing expense consists of personnel related costs (including salaries, sales commissions, bonuses, benefits, and stock-based compensation) for our sales and marketing employees, marketing activities, and related allocated overhead costs. Marketing activities include advertising, online

52

lead generation, customer and industry events, and candidate acquisition. We allocate a portion of overhead costs, such as rent, IT costs, supplies and depreciation and amortization, to sales and marketing expense based on headcount.

We expect that sales and marketing expenses will increase on an absolute dollar basis and may vary from period to period as a percentage of revenue for the foreseeable future as we plan to continue to invest in sales and marketing to attract both employers and job seekers to our marketplace and to increase our brand awareness. We expect that these expenses will continue to be our largest operating expense category for the foreseeable future as we continue to expand on our sales and marketing efforts.

Research and Development

Research and development expense consists of personnel related costs (including salaries, bonuses, benefits, and stock-based compensation) for our research and development employees, amortization of capitalized software costs associated with the development of the databases supporting our marketplace, and the cost of certain third-party service providers. We allocate a portion of overhead costs, such as rent, IT costs, supplies, and depreciation and amortization, to research and development expense based on headcount. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred.

We believe continued investments in research and development are important to attain our strategic objectives, and expect research and development expense to increase in absolute dollars. This expense may vary as a percentage of total revenue for the foreseeable future as we continue to invest in research and development activities related to ongoing improvements to, and maintenance of, our marketplace, expansion of our services, as well as other research and development programs, including the hiring of engineering, product development, and design employees to support these efforts.

General and Administrative

General and administrative expense consists of personnel related costs (including salaries, bonuses, benefits, and stock-based compensation) for employees in our executive, finance, human resource and administrative departments, and fees for third-party professional services, including consulting, legal and accounting services. General and administrative expense also consists of non-recurring costs as part of our transition to a publicly traded company and includes fees paid to our financial advisors in connection with our Direct Listing. In addition, we allocate a portion of overhead costs, such as rent, IT costs, supplies, and depreciation and amortization, to general and administrative expense based on headcount.

We expect to continue to invest in corporate infrastructure and incur additional expenses associated with transitioning to and operating as a public company, including expenses related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and higher expenses for investor relations costs, professional services, and director and officer insurance.

Interest Expense

Interest expense consists of interest costs associated with our outstanding borrowings, undrawn fees associated with our credit facility, payment-in-kind interest on our convertible notes with related parties, and amortization of issuance costs for our credit facility. Our convertible notes with related parties converted into shares of common stock in connection with the Direct Listing in May 2021.

Sublease Income

Sublease income consists of income earned from a noncancellable sublease agreement for one of our office facilities. The agreement terminated in March 2021.

53

Other Income (Expense), Net

Other income (expense) consists primarily of gains and losses from foreign currency exchange transactions. We have foreign currency exposure primarily related to personnel related expenses that are denominated in currencies other than the U.S. Dollar, principally the Canadian Dollar, British Pound and the Israeli New Shekel.

Income Tax Expense (Benefit)

We are subject to federal and state income taxes in the United States. For the year ended December 31, 2020, our effective tax rate of (34)% differed from the U.S. federal statutory tax rate of 21% primarily due to the release of a valuation allowance previously maintained against net U.S. federal and state deferred tax assets. As a result of our earnings in 2020 and forecasted taxable income, we released our valuation allowance against our net deferred tax assets, which resulted in an income tax benefit for 2020. For the year ended December 31, 2021, our effective tax rate of 139% differed from the U.S. federal statutory tax rate of 21% primarily due to excess tax benefits relating to the exercise of stock-based compensation, partially offset by other permanent items such as our Direct Listing costs and officer compensation limitations.

Results of Operations

A discussion regarding our financial condition and results of operations for fiscal year 2021 compared to fiscal year 2020 is presented below. A discussion regarding our financial condition and results of operations for fiscal year 2020 compared to fiscal year 2019 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our prospectus filed on May 26, 2021 pursuant to Rule 424(b)(4) dated May 14, 2021, under the Securities Act relating to the Registration Statement on Form S-1, as amended (File No. 333-255488), which is available free of charge on the SEC’s website at http://www.sec.gov.

54

The following table sets forth our consolidated results of operations for each of the periods presented:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2021","","2020"],["","","","","","(in thousands)"],["Revenue(1)","","","","","$","741,141","","","$","418,142"],["Cost of revenue(2)","","","","","79,614","","","54,163"],["Gross profit","","","","","661,527","","","363,979"],["Operating expenses"],["Sales and marketing(2)","","","","","410,665","","","191,141"],["Research and development(2)","","","","","110,470","","","69,408"],["General and administrative(2)(3)","","","","","148,784","","","38,998"],["Total operating expenses","","","","","669,919","","","299,547"],["Income (loss) from operations","","","","","(8,392)","","","64,432"],["Other income (expense)"],["Interest expense","","","","","(916)","","","(1,037)"],["Sublease income","","","","","151","","","1,051"],["Other income (expense), net","","","","","(119)","","","(109)"],["Total other income (expense), net","","","","","(884)","","","(95)"],["Income (loss) before income taxes","","","","","(9,276)","","","64,337"],["Income tax expense (benefit)","","","","","(12,876)","","","(21,711)"],["Net income","","","","","$","3,600","","","$","86,048"]]
[[/GREPCENT_TABLE]]

____________

(1)Revenue is comprised as follows:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2021","","2020"],["","","","","","(in thousands)"],["Subscription revenue","","","","","$","600,090","","","$","346,781"],["Performance-based revenue","","","","","141,051","","","71,361"],["Total revenue","","","","","$","741,141","","","$","418,142"]]
[[/GREPCENT_TABLE]]

(2)Includes stock-based compensation expense as follows:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2021","","2020"],["","","","","","(in thousands)"],["Cost of revenue","","","","","$","1,093","","","$","73"],["Sales and marketing","","","","","17,865","","","704"],["Research and development","","","","","34,230","","","3,050"],["General and administrative","","","","","54,070","","","1,925"],["Total stock-based compensation","","","","","$","107,258","","","$","5,752"]]
[[/GREPCENT_TABLE]]

(3)Includes one-time charges related to financial advisory services, accounting and legal expenses, the bonus earned by our Chief Executive Officer, and other filing costs in connection with our Direct Listing totaling $34.0 million and $0 in the years ended December 31, 2021 and 2020, respectively.

55

Comparison of the Years Ended December 31, 2021 and 2020

Revenue

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,"],["","","","","","","","","","2021","","2020","","$ Change","","% Change"],["","","","","","","","","","(in thousands, except percentages)"],["Total revenue","","","","","","","","","$","741,141","","","$","418,142","","","$","322,999","","","77","%"]]
[[/GREPCENT_TABLE]]

Revenue increased $323.0 million, or 77%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. Subscription revenue increased by $253.3 million, or 73%, while performance-based revenue increased $69.7 million, or 98%, for the same period. The increase in subscription revenue was primarily due to the number of Quarterly Paid Employers in our marketplace as we ramped up our marketing spend and the macroeconomic environment continued to improve from the economic downturn caused by the COVID pandemic. The increase in performance-based revenue was primarily due to the onboarding of new customers who run sophisticated recruitment marketing campaigns in addition to increased budgets as employers' hiring needs ramped up as the economy continued to recover.

Cost of Revenue and Gross Margin

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,"],["","","","","","","","","","2021","","2020","","$ Change","","% Change"],["","","","","","","","","","(in thousands, except percentages)"],["Cost of revenue","","","","","","","","","$","79,614","","","$","54,163","","","$","25,451","","","47","%"],["Gross margin","","","","","","","","","89","%","","87","%"]]
[[/GREPCENT_TABLE]]

Cost of revenue increased $25.5 million, or 47%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to an increase of $8.9 million in job distribution costs from performance-based revenue, an increase of $7.0 million in credit card processing fees and an increase of $6.0 million in partner revenue share amounts. Total gross margin improved from 87% to 89% in the years ended December 31, 2020 and December 31, 2021, respectively, and reflects our continued commitment to operational efficiencies and maintaining costs proportionate to revenue growth.

Sales and Marketing

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,"],["","","","","","","","","","2021","","2020","","$ Change","","% Change"],["","","","","","","","","","(in thousands, except percentages)"],["Sales and marketing","","","","","","","","","$","410,665","","","$","191,141","","","$","219,524","","","115","%"],["Percentage of revenue","","","","","","","","","55","%","","46","%"]]
[[/GREPCENT_TABLE]]

Sales and marketing expenses grew $219.5 million, or 115%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily due to an additional $182.3 million in marketing and advertising versus the prior-year period. Personnel related costs for our sales and marketing employees increased by $20.0 million, largely due to an increase in headcount. Stock-based compensation costs increased $17.2 million, primarily attributable to our RSUs which vested as a result of our board of directors’ waiver of the liquidity event-based vesting condition during the second quarter of 2021, in addition to the ongoing stock-based compensation expense related to our RSU awards over the remaining service period.

56

Research and Development

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,"],["","","","","","","","","","2021","","2020","","$ Change","","% Change"],["","","","","","","","","","(in thousands, except percentages)"],["Research and development","","","","","","","","","$","110,470","","","$","69,408","","","$","41,062","","","59","%"],["Percentage of revenue","","","","","","","","","15","%","","17","%"]]
[[/GREPCENT_TABLE]]

Research and development expenses increased $41.1 million, or 59%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to an increase in stock-based compensation of $31.0 million mostly attributable to our RSUs which vested as a result of our board of directors’ waiver of the liquidity event-based vesting condition during the second quarter of 2021, in addition to the ongoing stock-based compensation expense related to our RSU awards over the remaining service period. Personnel related costs for our research and development employees increased by $8.7 million, primarily attributable to an increase in headcount.

General and Administrative

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,"],["","","","","","","","","","2021","","2020","","$ Change","","% Change"],["","","","","","","","","","(in thousands, except percentages)"],["General and administrative","","","","","","","","","$","148,784","","","$","38,998","","","$","109,786","","","282","%"],["Percentage of revenue","","","","","","","","","20","%","","9","%"]]
[[/GREPCENT_TABLE]]

General and administrative expenses increased $109.8 million, or 282%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to an increase in stock-based compensation of $47.9 million attributable to our RSUs which vested as a result of our board of directors’ waiver of the liquidity event-based vesting condition during the second quarter of 2021, in addition to the ongoing stock-based compensation expense related to the vesting of RSU awards that was not applicable in the prior-year period, and to a lesser extent, the increase also related to the $4.2 million of stock-based compensation expense in the current period related to the modification of RSUs and options granted to a former executive. Additionally, we incurred non-recurring fees for legal, accounting, and other costs related to the Direct Listing for the year ended December 31, 2021 totaling $24.0 million, of which $19.4 million was paid to our financial advisors. An additional $10.0 million bonus was paid to our CEO in connection with the Direct Listing. An overall increase in general professional consulting fees, directors’ and officers’ insurance and general investor marketing fees totaling $3.5 million was incurred as part of the transition to becoming a public company. Furthermore, we recorded a non-income tax expense of $8.7 million in the year ended December 31, 2021. We record non-income taxes that may result from examinations by, or any anticipated negotiated agreements with, tax authorities when a loss is probable and reasonably estimable. Lastly, personnel related expenses for our general and administrative employees increased by $5.2 million, primarily attributable to an increase in headcount.

Other Income (Expense), Net

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,"],["","","","","","","","","","2021","","2020","","$ Change","","% Change"],["","","","","","","","","","(in thousands, except percentages)"],["Other income (expense), net","","","","","","","","","$","(884)","","","$","(95)","","","$","(789)","","","831","%"]]
[[/GREPCENT_TABLE]]

There were immaterial fluctuations in other income (expense) for the year ended December 31, 2021 compared to the year ended December 31, 2020.

57

Income Tax Expense (Benefit)

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,"],["","","","","","","","","","2021","","2020","","$ Change","","% Change"],["","","","","","","","","","(in thousands, except percentages)"],["Income tax expense (benefit)","","","","","","","","","$","(12,876)","","","$","(21,711)","","","$","8,835","","","(41)","%"],["Effective tax rate","","","","","","","","","139","%","","(34)","%"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2021, our tax benefit reduced by $8.8 million as compared to the year ended December 31, 2020. Our effective tax rate in December 31, 2021 and 2020 was 139% and (34)%, respectively. Our effective tax rate for the year ended December 31, 2021 differed from the U.S federal statutory rate of 21% primarily due to excess tax benefits relating to the exercise of stock-based compensation, partially offset by permanent book-tax differences such as limitations on the deductibility of executive compensation and one time expenses related to our Direct Listing. Our effective tax rate for the year ended December 31, 2020 differed from the U.S federal statutory rate of 21% primarily due the one-time release of a valuation allowance against deferred tax assets.

Liquidity and Capital Resources

As of December 31, 2021, we had cash totaling $254.6 million and $244.2 million available in unused borrowing capacity under our Current Revolving Line (as defined below). We have financed our operations and capital expenditures primarily through cash generated from operations, sales of shares of common and preferred stock and from bank loans and convertible notes. As of December 31, 2021, we had no amounts outstanding under our Current Revolving Line.

Subsequent to December 31, 2021, in January 2022, we completed the previously announced private offering of $550.0 million aggregate principal amount of Senior Notes due 2030, or the Notes. The Notes mature on January 15, 2030 and bear interest at a rate of 5% per year. We intend to use the net proceeds from the offering for general corporate purposes, which may include capital expenditures, investments, and working capital. We believe that these funds will further enhance our financial flexibility and liquidity. The Notes are described in more detail in Note 16 “Subsequent Events” to our consolidated financial statements in this Annual Report on Form 10-K.

We believe our existing cash, cash flow from operations, and amounts available for borrowing under our Current Revolving Line will be sufficient to meet our working capital requirements for at least the next twelve months. To the extent existing cash, cash from operations, and amounts available for borrowing are insufficient to fund future activities, we may need to raise additional funds. In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of additional indebtedness, we may be subject to increased fixed payment obligations and could also be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. There can be no assurances that we will be able to raise additional capital. The inability to raise capital could adversely affect our ability to achieve our business objectives.

Prior Revolving Credit Facility

We previously entered into a loan and security agreement with a financial institution that provided for a revolving credit facility, or the Prior Revolving Line. Our Prior Revolving Line terminated on April 30, 2021 when we entered into a new credit facility as described below.

58

Current Revolving Credit Facility

In April 2021, we entered into a Credit Agreement with a syndicate of banks, or the Credit Agreement. The Credit Agreement provides for a $250.0 million revolving credit facility, or the Current Revolving Line, and has a maturity date of April 30, 2026. The amount available under the Current Revolving Line is reduced by letters of credit outstanding, which totaled $5.8 million as of December 31, 2021. The letters of credit outstanding relate to various leased office spaces.

The Current Revolving Line bears interest at a rate based upon our Net Leverage Ratio. Our Net Leverage Ratio is defined as total debt less total cash and permitted investments outstanding at period end, with a maximum total cash and permitted investments adjustment of $100.0 million, divided by the trailing twelve month of earnings, adjusted for items such as non-cash expenses and other nonrecurring transactions. We are also obligated to pay other customary fees for a credit facility of this size and type, including a commitment fee on a quarterly basis based on amounts committed but unused under the revolving credit facility at a rate between 0.25% to 0.35%, based upon our Net Leverage Ratio.

The Current Revolving Line is collateralized by security interests in substantially all of our assets. The Current Revolving Line includes customary events of default that include, among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of certain covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments against us, and a change of control. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement.

The Credit Agreement contains customary representations, warranties, affirmative covenants, such as financial statement reporting requirements, negative covenants, and financial covenants, such as maintenance of certain net leverage ratio requirements, applicable to us. The negative covenants include restrictions that, among other things, restrict our and our subsidiaries’ ability to incur liens and indebtedness, make certain investments, declare dividends, dispose of, transfer or sell assets, make stock repurchases and consummate certain other matters, all subject to certain exceptions.

On November 19, 2021, we entered into an amendment to the Credit Agreement with a syndicate of banks and the lenders named therein, to amend certain other provisions under the Credit Agreement relating to how letters of credit denominated in currencies other than U.S. Dollars are valued under the Credit Agreement. 

We have no amounts outstanding under the Current Revolving Line and are in compliance with our debt covenants as of December 31, 2021.

On January 10, 2022, we entered into a second amendment to the Credit Agreement, or the Second Amendment, with a syndicate of banks and the lenders named therein. The Second Amendment increases the maximum amount of liquidity (including cash and permitted investments) that may be netted against our total indebtedness from $100.0 million to $550.0 million for purposes of calculating our total net leverage ratio under the Credit Agreement.

Convertible Notes with Related Parties

In June 2020, we issued subordinated secured convertible promissory notes, or the Convertible Notes, to related parties who were then holders of our Redeemable Convertible Preferred Stock. The Convertible Notes totaled $25.0 million and had a maturity date of June 22, 2023. In May 2021, the Convertible Notes converted into shares of common stock in connection with the Direct Listing and were no longer outstanding as of December 31, 2021.

59

Cash Flows

The following table summarizes our cash flows for the periods presented (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["Net cash provided by operating activities","$","144,136","","","$","88,013"],["Net cash used in investing activities","(13,336)","","","(7,373)"],["Net cash provided by (used in) financing activities","9,282","","","(1,630)"],["Net increase in cash","$","140,082","","","$","79,010"]]
[[/GREPCENT_TABLE]]

Operating Activities

The primary source of operating cash inflows is cash collected from our customers for our services. Our primary uses of cash from operating activities are for personnel related expenditures, marketing costs and third-party costs incurred to support our marketplace.

For the year ended December 31, 2021, cash provided by operating activities was $144.1 million resulting from our net income of $3.6 million, adjusted by non-cash charges of $109.2 million and a net increase of $31.4 million in our operating assets and liabilities. The non-cash charges primarily resulted from $107.3 million for stock-based compensation expense, $9.5 million pertaining to amortization of intangible assets and depreciation, and $5.4 million pertaining to non-cash lease expense, partially offset by $14.9 million related to the change in our deferred tax assets primarily driven by current year pretax losses and the tax related impact of stock-based compensation. The increase in our operating assets and liabilities was primarily driven by an increase of $56.6 million in our accrued expenses and other liabilities and accounts payable as we increased our marketing spend during the year ended December 31, 2021, partially offset by an increase of $22.4 million in our accounts receivable associated with an increase in revenue due to the number of Quarterly Paid Employers compared to the prior year.

For the year ended December 31, 2020, cash provided by operating activities was $88.0 million resulting from our net income of $86.0 million, adjusted by non-cash charges of $1.9 million and a net decrease of $0.1 million in our operating assets and liabilities. The non-cash charges primarily resulted from $9.9 million pertaining to amortization of intangible assets and depreciation, $5.8 million for stock-based compensation expense, $5.6 million pertaining to non-cash lease expense, and $3.2 million related to provision for bad debts, partially offset by $22.9 million related to the change of our deferred tax assets driven by the release of our domestic valuation allowance.

Investing Activities

For the year ended December 31, 2021, cash used in investing activities was $13.3 million resulting from an increase of $7.3 million related to capitalized software development costs and an increase in capital expenditures of $6.1 million primarily related to leasehold improvements for one of our operating leases.

For the year ended December 31, 2020, cash used in investing activities was $7.4 million resulting from an increase in capitalized software development costs of $6.0 million and an increase in capital expenditures of $1.4 million to purchase property and equipment.

Financing Activities

For the year ended December 31, 2021, cash provided by financing activities was $9.3 million which consisted of $18.5 million of proceeds from the exercise of stock options partially offset by $5.2 million for the net settlement of taxes on restricted stock units, $2.8 million for the repurchase of common stock, and $1.3 million for the payment of the issuance costs related to our new credit facility.

60

For the year ended December 31, 2020, cash used in financing activities was $1.6 million, which primarily consisted of $19.0 million for the repurchase of common stock from some of the founders, and $10.0 million of net repayment on our term loan, partially offset by net proceeds of $25.0 million in proceeds from our convertible notes with related parties, and $2.4 million of proceeds from the exercise of stock options.

Obligations and Other Commitments

See Note 11 of the audited consolidated financial statements and related notes included in this Annual Report on Form 10-K for our future minimum commitments related to certain software service agreements. Through December 31, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are both the most important to the portrayal of our net assets and results of operations and require difficult, subjective, or complex judgments. We often need to make estimates about the effect of matters that are inherently uncertain and these estimates are developed based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

Critical accounting estimates are accounting estimates where the nature of the estimates are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and the impact of the estimates on financial condition or operating performance is material.

The critical accounting policies and estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

We derive our revenue primarily from fees for subscription services and performance-based job posting activities. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:

•Identification of the contract, or contracts, with a customer

•Identification of all performance obligations in the contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

•Recognition of revenue when, or as, the performance obligation or obligations are satisfied

We identify enforceable revenue contracts when the terms are agreed to by the customer. Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market

61

conditions and other factors, including the value of our contracts, the products sold, and the number and types of users within our contracts.

Revenue is recognized as performance obligations are satisfied and is presented net of sales allowances.

We derive our revenues from the following sources:

Subscription Revenue

Subscription revenue consists of time-based job posting plans, upsells which complement or expand visibility and prominence to job posting plans, and resume database plans. Plans are priced at a flat rate based on plan size and depending on the length of the term. Customer contracts are typically subject to renewal at the end of the subscription term and are nonrefundable.

Time-based job posting plans: Job posting plans provide customers access to cloud-based software services, where they may create job postings that are posted to our marketplace in addition to numerous other job sites or partner networks with job seeker communities. Customers may also access our software to review job applications and manage job postings. We recognize revenue from job posting plans ratably over the term of the agreement beginning on the date the subscription service is made available to the customer. Once a customer requests a cancellation of their subscription, the open job postings are closed at the end of the term; however, the customer may still access the software to review past job postings or prior applications received under a separate upsell subscription. Job posting plans are billed in advance of the subscription period, which typically ranges from one to twelve months, except for daily subscription plans, which are billed in arrears based on how many days the customer uses the services.

Upsell services: Additional features to complement or expand visibility to job posting plans may be purchased as an upsell service. For these services, we bill the customers in advance and recognize revenue ratably over the term of the agreement beginning on the date the upsell services are made available to the customer, which typically ranges from one to twelve months.

Upsell services also include job posting enhancements which are applied to individual job postings, and provide customers with a temporary boost in the prominence of their open jobs. Individual job posting enhancements may be purchased by a customer when needed, or in recurring monthly prepaid bundles to complement their job posting subscription plan, and are billed in advance of use. Typically these prepaid bundles can be used over a period ranging from one to twelve months. Revenue from job posting enhancements is recognized as the customer uses the enhancement on their job postings. Unused prepaid job enhancements are not refundable, and we recognize revenue for the estimated portion of prepaid job enhancements that are expected to expire unused, or breakage, based on estimates considering historical breakage levels for similarly sized customers and upsell plans. Breakage is recognized as revenue in proportion to the pattern of actual usage by customers.

Resume database plans: Access to our resume database is purchased on a subscription basis and allows a customer to search for and view resumes. Resume database plans are priced based on how many resumes the customer would like to view in a month and may be purchased independent of, or in addition to, a job posting plan. Resume database plans are billed in advance of the subscription period, which typically ranges from one to twelve months. Revenue is recognized ratably over the subscription period.

Performance-based Revenue

Performance-based revenue consists of customers who pay on a per click by job applicant or per job application basis for the job postings customers wish to distribute through our software. Customers pay an amount per click or per application that is usually capped at a contractual maximum per recruitment campaign, with campaigns typically lasting from one to three months. Customers on this pricing model do not have access to our applicant tracking software for subscription customers though they may purchase

62

resume database subscription plans separately. Customers that use a performance-based revenue plan are typically companies with consistent hiring needs and sophisticated recruitment campaigns where they manage incoming applications and job postings on their own ATSs.

Performance-based revenue is typically billed monthly, in arrears, and revenue is recognized as job applicants click on or apply to the distributed job postings, up to the contractual maximum per recruitment campaign.

Sales Allowance

We establish a sales allowance to estimate refunds and credits that we may grant to customers in the future for cancellations of subscriptions and concessions to customers who are not satisfied with services received. While subscriptions are noncancelable once the contract term has commenced, we may at times allow customers who miss their cancellation window prior to an autorenewal to cancel their contract, and we may issue refunds or credits to maintain overall customer satisfaction. The sales allowance is estimated by considering historical results and trends and is accounted for as a reduction to revenue or deferred revenue for contracts where payments are received upfront and revenue is recognized over time.

Stock-Based Compensation

Compensation expense related to stock-based awards is measured and recognized in the financial statements based on the fair value of the awards granted. The fair value of each option award and employee stock purchase right associated with its employee share purchase program (ESPP) is estimated on the grant date using the Black-Scholes option-pricing model. We have elected to treat stock-based awards with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation expense on a straight-line basis over the requisite service period.

For awards that contain both performance and service vesting conditions, the grant date fair value is recognized as compensation expense using a graded vesting attribution model. No expense is recognized for awards with performance conditions until the performance condition is probable of being met.

The Black-Scholes option pricing model requires us to make certain assumptions including:

Fair Value of our Common Stock. See the section titled “—Determination of the Fair Value of Common Stock on Grant Dates” below.

Expected Term. Given that we do not have sufficient exercise history to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior, we determine the expected term for our “plain vanilla” stock options using the simplified method, which is calculated as the midpoint of the stock option vesting term and the expiration date of the stock option. For stock options that contain a performance condition, we are using the contractual term as the expected term as those awards were only granted to nonemployees.

Expected Volatility. Because our common stock has limited trading history, we estimate the expected volatility of the awards from the historical volatility of selected public companies that represent similar but alternative investment opportunities to an investment in us. Characteristics considered in identifying guideline public companies include similarity in size, lines of business, market capitalization, revenue and financial leverage. We determined the expected volatility assumption using the frequency of daily historical prices of comparable public company common stock for a period equal to the expected term of the option. We periodically assess the comparable companies and other relevant factors used to measure expected volatility for stock option grants.

Risk-free Rate. The risk-free interest rate assumption is based upon observed interest rates on the U.S. government securities appropriate for the expected term of our employee stock options.

63

Dividend Yield. The dividend yield assumption is based on our history and expectation of dividend payouts. We have never declared nor paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If we had made different assumptions, our stock-based compensation expense and our results of operations for the years ended December 31, 2021, 2020, and 2019 may have been significantly different.

Determination of the Fair Value of Common Stock on Grant Dates

Prior to the completion of our Direct Listing on May 26, 2021, our common stock was not publicly traded, and therefore, our board of directors exercised significant judgment in determining the fair value of our common stock on the date of each stock-based grant, with input from management and the assistance from an independent third-party valuation firm based on several objective and subjective factors. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In determining the fair market value of our common stock prior to the Direct Listing, the board of directors considered the following:

•the prices of our redeemable convertible preferred stock sold to outside investors in arms-length transactions;

•the rights, preferences and privileges of our redeemable convertible preferred stock relative to our common stock;

•our operating and financial performance;

•the present value of our anticipated future cash flows;

•our stage of development and current business conditions and projections affecting our business, including the introduction of new products and services;

•the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of our company, in light of prevailing market conditions;

•any adjustment necessary to recognize a lack of a liquid trading market for our common stock;

•the market performance of comparable publicly traded companies; and

•the overall U.S. economic, regulatory and capital market conditions.

In valuing our common stock, our board of directors determined the equity value of our business using various valuation methods including market and income approaches with input from management.

The market approaches we used prior to the Direct Listing were the Guideline Public Company Method and the Guideline Transaction Method. The Guideline Public Company Method estimated our equity value by applying a representative market value multiple from comparable companies to our financial forecasts. The Guideline Transaction Method estimated our equity value by using pricing multiples derived from sales of companies with similar characteristics to us. Under the income approach, a Discounted Cash Flow, or DCF, model was used, where net cash flows attributable to our business and an assumed terminal value were discounted to present value using a discount rate, based on our estimated weighted average cost of capital that reflected the risks inherent in the cash flows.

After determining our equity value, we then allocated the equity value to our classes of stock using either an Option Pricing Method, or OPM, or a hybrid of OPM and Probability Weighted Expected Return Method, or PWERM.

64

The OPM allocated values to each equity class by creating a series of call options on our equity value, with exercise prices based on the liquidation preferences, participation rights, and strike prices of the equity instruments. In determining the estimated fair value of our common stock, we considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we also applied a discount for lack of marketability to the equity value.

Under the hybrid OPM and PWERM, the allocation was based on the likelihood of a near-term liquidity exit or an alternative exit scenario. For a near-term liquidity scenario, the allocation was based on the expected pricing and timing of the liquidity event. For the alternative exit scenario, an OPM with an appropriate time to liquidity was used to estimate the fair value of the share classes assuming the near-term liquidity scenario does not occur, with the resulting share values under each scenario weighted by management’s estimate of their respective probabilities. We also applied a discount for lack of marketability.

In valuing our common stock at various dates in 2019 through September 30, 2020, our board of directors determined the equity value of our business using the Guideline Public Company Method and the equity value was then allocated to our classes of stock using an OPM given the uncertainty with regards to the timing and type of future exit scenario.

In valuing our common stock as of December 31, 2020 and March 31, 2021, our board of directors determined the equity value of our business using the Guideline Public Company Method, the Guideline Transaction Method, and a DCF. The equity value was then allocated to our classes of stock using the hybrid OPM and PWERM based on management’s estimate of the likelihood of a near-term liquidity event or an alternative exit scenario.

Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue and costs, future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future exit events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

For stock awards granted after the completion of our Direct Listing on May 26, 2021, our board of directors determined the fair value of each share of underlying common stock based on the New York Stock Exchange, or NYSE, closing price on the date prior to the date of grant.

We have granted RSUs to certain of our employees and directors. The granted RSUs vest upon the satisfaction of both a time-based service condition and a liquidity event requirement. The time-based service condition for these awards is generally satisfied over four years. The liquidity event requirement is satisfied upon the earliest to occur of a qualifying event, defined as a change of control transaction or after a set period of time following the effective date of our initial public offering pursuant to an effective registration statement under the Securities Act for the offer and sale of shares by ZipRecruiter. A direct listing in which we did not sell our equity securities would not have satisfied the liquidity event performance condition; however, on April 19, 2021, our board of directors waived the liquidity event performance condition for the 6.9 million RSUs then outstanding so those that had satisfied the service condition would vest upon the earlier of the first day of trading of our common stock on the NYSE, or March 15, 2022. As the satisfaction of the performance condition was not probable for accounting purposes prior to the waiver, the waiver of the liquidity event-based performance condition resulted in the remeasurement of the modified awards at fair value on the date of the waiver, which management estimated to be $25.04 per share or approximately $172.6 million.

Stock-based Compensation for Awards with a Market Condition

In April 2021, we granted an RSU award (the “CEO Performance Award”), which included service, market, and performance-based vesting conditions. The fair value of the award is determined using a Monte Carlo simulation model. The associated stock-based compensation expense is recorded over the

65

requisite service period, using a graded attribution method. The requisite service period is the longer of the service period derived from the Monte Carlo simulation model and the explicit service period the CEO is required to remain employed to vest in the award. The market condition is satisfied upon achieving certain stock price targets for a period following the completion of our Direct Listing. The CEO Performance Award also contains an implied performance-based vesting condition as the CEO’s ability to earn the award was contingent upon the completion of the Direct Listing. Accordingly, no expense was recognized prior to the completion of our Direct Listing on May 26, 2021, as vesting was not considered probable for accounting purposes until the Direct Listing occurred. Provided that Ian Siegel continues to be the CEO of ZipRecruiter, stock-based compensation expense is recognized over the requisite service period, regardless of whether the stock price targets are achieved. If the stock price targets are met sooner than the derived service period, we will accelerate the recognition of stock-based compensation expense to reflect the cumulative expense associated with the vested shares.

Income Taxes

We account for income taxes in accordance with Accounting Standards Codification 740, Income Taxes. Current tax liabilities and assets are recognized for the estimated taxes payable or refundable, respectively, on the tax returns for the current year. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent upon future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be realized against future taxable income. To the extent we believe that realization is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our income tax expense in the period when such determination is made. During the fourth quarter of 2020, based on the current earnings and forecasted taxable income, we determined that it was more likely than not that those assets will be realized. Accordingly, we released the valuation allowance of $37.7 million against our deferred tax assets. Although we incurred a current year pretax loss due to various expenses associated with our Direct Listing, we have a recent history of cumulative earnings, and we expect to return to profitability in subsequent years to generate sufficient taxable income to utilize our deferred tax assets. Thus, no valuation allowance has been recorded as of the date of the Consolidated Balance Sheets.

On a quarterly basis, we evaluate the probability a tax position will be effectively sustained, and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in income tax expense.

JOBS Act Accounting Election

We meet the definition of an emerging growth company under the JOBS Act, which permits us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies.

Recent Accounting Pronouncements

See Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.

66