Valuing employee stock options

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Now that companies are required to expense employee stock options, this creates the problem of figuring out what their value should be. [*]. The major problem appears to be that because employee stock option options are restricted (e.g., they vest, can't be transferred, hedged, etc.), their value (and hence cost to to the company) is substantially less than that of an ordinary option. Any expensing scheme needs to reflect the restricted nature of employee options and--unlike with ordinary options--we have no good models for doing so.

The predominant idea seems to be to use the market to value the options. For instance, the company might try to sell some subset of the options to institutional investors and use the price they're willing to pay as a proxy for the value of the option. Cisco proposed a plan like this but the SEC rejected it saying that the restrictions don't really match those employees experience and so the option valuations won't be right.

Any analytic model needs to take into account the probability that employees will quit and leave their options on the table. As that depends largely on employee psychology, it's probably going to be a lot less amenable to modelling than are ordinary options.

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1 Comments

Value of options, as declared on my 1040s: $0.

Expensing stock options is idiocy.

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