Share-Based Compensation

LLC Incentive Units

As part of the Second Amended and Restated Limited Liability Company Agreement of Brigham Resources, LLC dated May 8, 2015, Brigham Resources authorized 120,000 restricted incentive units for issuance to management, independent directors, employees, and consultants (such incentive units, as converted as described below, the “Incentive Units”). Brigham Resources granted Incentive Units in April 2013 and September 2015 and 2018. In connection with the 2018 corporate reorganizations and the corporate reorganization consummated in connection with Brigham Minerals’ IPO (collectively with the 2018 corporate reorganizations, the “corporate reorganization”), these Incentive Units were converted into units in Brigham Equity Holdings, LLC (“Brigham Equity Holdings”) with equivalent rights, responsibilities, and preferences. The Incentive Units are subject to vesting as follows: 20% of the Incentive Units were vested on the date of grant and 20% of the Incentive Units vest on each anniversary of the date of grant if the holder remains continuously employed by Brigham Resources or its affiliates through the applicable vesting date. Upon vesting of the Incentive Units, holders of the Incentive Units receive one share of Brigham Minerals’ Class B common stock and one Brigham LLC Unit for each vested Incentive Unit.

In connection with the completion of the IPO, Brigham LLC and Brigham Equity Holdings discontinued granting new Incentive Units; however Brigham Equity Holdings will continue to administer the existing awards that remain outstanding. As discussed in “Note 9.—Temporary Equity,” participants may receive one share of Brigham Minerals’ Class A common stock in exchange for one share of Class B common stock and one Brigham LLC Unit, or cash at the option of Brigham Minerals. Brigham Minerals accounts for the Incentive Units as compensation cost measured at the fair value of the award on the date of grant. No compensation expense was recognized prior to the IPO because the IPO was not considered probable.

A summary of the Incentive Unit activity for the year ended December 31, 2019 is as follows:



	Incentive Units
(In thousands)	Number of Incentive Units		Grant-date Fair Value
Outstanding—January 1, 2019	3,272		$	1.49
Vested	(3,060	)	$	0.89
Outstanding—December 31, 2019	212		$	10.04

A summary of the Incentive Unit activity for the year ended December 31, 2018 is as follows:



	Incentive Units
(In thousands)	Number of Incentive Units	Grant-date Fair Value
Outstanding—January 1, 2018	2,918	$	0.45
Granted	354	10.04
Vested	—	—
Outstanding—December 31, 2018	3,272	$	1.49

Brigham LLC used a third-party valuation specialist to assist management in its estimation of the grant-date fair value of the Incentive Units on the respective grant dates during 2013, 2015 and 2018. Brigham LLC used the Black-Scholes option pricing valuation model with the following weighted-average assumptions



	Incentive Units
	2018 Awards		2015 Awards		2013 Awards
Expected volatility	28	%	33	%	40	%
Expected dividend yield	—		—		—
Expected term (in years)	0.7		3.7		6.2
Risk-free interest rates	2.45	%	1.07	%	0.94	%
Weighted-average grant date fair value per Incentive Unit	$10.04		$0.03		$1.51

Long Term Incentive Plan

In connection with the IPO, Brigham Minerals adopted the Brigham Minerals, Inc. 2019 Long Term Incentive Plan (“LTIP”) for employees, consultants and directors who perform services for Brigham Minerals. The LTIP provides for issuance of awards based on shares of Class A common stock. Brigham Minerals has issued restricted stock awards ("RSAs"), restricted stock units ("RSUs") and performance-based vesting units ("PSUs") under the LTIP. The shares to be delivered under the LTIP shall be made available from (i) authorized but unissued shares, (ii) shares held as treasury stock or (iii) previously issued shares reacquired by Brigham Minerals including shares purchased on the open market. A total of 5,999,600 shares of Class A common stock have been authorized for issuance under the LTIP. At December 31, 2019, 4,416,069 shares of Class A common stock remained available for future grants. Currently, all outstanding RSAs, RSUs and PSUs granted under the LTIP are entitled to receive dividends (in the case of RSAs) or have dividend equivalent rights (“DERs”), which entitle holders of RSUs and PSUs to the same dividend value per share as holders of the Company’s Class A common stock. Such dividends and DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSAs, RSUs, and PSUs. Dividends and DERs are accumulated and paid when the underlying shares vest. The fair value of the RSA awards granted with the right to receive dividends and RSU awards granted with the right to receive DERs are generally based on the trading price of the Company’s Class A common stock as of the date of grant. Brigham Minerals accounts for the awards granted under the LTIP as compensation cost measured at the fair value of the award on the date of grant.

RSAs are grants of shares of Class A common stock subject to a risk of forfeiture and restrictions on transferability. The share-based compensation expense of such RSAs was determined using the closing price of Class A common stock on April 23, 2019, the date of grant, of $21.25. On April 23, 2019, 312,189 RSAs were granted and 152,742 RSAs vested immediately. The remaining unvested RSAs generally vest in one-third increments on each of April 23, 2020, 2021 and 2022 and are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases providing services to Brigham Minerals prior to the lapse of such restrictions. During the year ended December 31, 2019, 10,991 RSAs were forfeited. Brigham Minerals accounts for forfeitures as they occur.

RSUs represent the right to receive shares of Class A common stock at the end of the vesting period in an amount equal to the number of RSUs that vest. The RSUs that have been granted generally vest in one-third increments on each of the first three anniversaries of the grant date and are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases providing services to Brigham Minerals prior to the date the award vests. The share-based compensation expense of such RSUs was determined using the closing price on April 23, 2019, the date of grant, of $21.25 applied to the total number of 598,891 RSUs granted. Brigham Minerals accounts for forfeitures as they occur. During the year ended December 31, 2019, 183,082 RSUs vested and no RSUs were forfeited. Brigham Minerals withheld 59,111 RSUs to satisfy employee tax withholding obligations related to the RSUs that vested in 2019.

PSUs represent the right to receive shares of Class A common stock on at the end of a specified performance period. 753,546 PSUs (based on target) were granted on April 23, 2019, with a performance period that ends on December 31, 2021. The terms and conditions of the PSUs allow for vesting of the awards ranging between 0% (or forfeiture) and 200% of target. The vesting level is calculated based on the actual total stockholder return achieved during the performance period including projected dividends. The fair value of such PSUs was determined using a Monte Carlo simulation and will be recognized over the applicable performance period. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award to calculate the fair value of the award. Expected volatilities in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant. Using the assumptions in the table below, Brigham Minerals estimated the fair value of PSUs at the date of grant to be $20.36.



	Performance-Based Restricted Stock Units
Expected dividend yield	8.1	%
Risk-free interest rate	2.3	%
Volatility	30	%

The number of PSUs that will be earned is estimated quarterly and as of December 31, 2019, we estimated that 451,933 PSUs will be earned. No PSUs were forfeited or vested during the year ended December 31, 2019.

Share-Based Compensation Expense

Share-based compensation expense is included in general and administrative expense in the Company’s consolidated and combined statement of operations included within this Annual Report. Share-based compensation cost recorded for each type of share-based compensation award, was as follows for the periods indicated:



	Years Ended December 31,
(In thousands)	2019			2018		2017
Incentive Units (1) (3)	$	2,904		$	—	$	—
RSAs (2) (3)	3,972			—		—
RSUs (3)	4,630			—		—
PSUs (4)	2,361			—		—
Capitalized share-based compensation (5)	(3,818		)	—		—
Total share-based compensation expense	$	10,049		$	—	$	—


(1)	Includes a cumulative effect adjustment to share-based compensation cost of $2.0 million pertaining to the period from the grant date through the IPO date. No compensation expense was recorded prior to the IPO because the IPO was not considered probable.


(2)	Includes $3.2 million recorded at grant date of April 23, 2019, associated with 152,742 RSAs, which vested immediately.


(3)	Share-based compensation expense relating to Incentive Units, restricted stock awards and time-based restricted stock units with ratable vesting is recognized on a straight-line basis over the requisite service period for the entire award.


(4)	Share-based compensation expense relating to PSUs with cliff-vesting is recognized on a straight-line basis over the performance period for the entire award.


(5)	During the year ended December 31, 2019, Brigham Minerals capitalized $3.8 million of the share-based compensation to unevaluated property on its balance sheet.

In addition to the time-based vesting conditions described above, the Incentive Units could be earned upon the completion of an initial public offering or another liquidity event, considered a performance condition, which was not deemed probable and therefore no compensation expense was recognized prior to December 31, 2018.

Future Share-Based Compensation Expense

The following table reflects the future share-based compensation expense to be recorded for the share-based compensation awards that were outstanding at December 31, 2019, a portion of which will be capitalized:



(In thousands)	Incentive Units		RSAs		RSUs		PSUs		Total
2020	$	712	$	1,052	$	4,217	$	3,419	$	9,400
2021	712		1,052		3,890		3,419		9,073
2022	534		326		—		—		860
Total	$	1,958	$	2,430	$	8,107	$	6,838	$	19,333