Black-Scholes Valuations

Dimensions of Employee Stock Options

A stock-option grant to an employee contains a number of important variables:

• strike price
• expiration date
• vesting schedule
• number of shares
• legalese

Let’s take a look…

Strike price

The strike price is the price at which the employee can purchase the shares from the organization. Regardless of the market value (at any time), the strike price is a set amount for which they can buy the shares.

There are a couple of other generic terms for strike price:

• option price
• AND
• exercise price

The strike price is usually the market price on the date of issue of the stock option grant. If it isn’t, then there are tax consequences.

Number of shares

The number of shares would seem to be an obvious variable. Each option grant has the maximum number of shares that can be purchased at the strike price.

This number should have a relationship to:

• the performance of the employee
• AND
• the employee’s level in the organization

Shares are usually granted in multiples of 100.

Vesting schedule

Employee stock options have a date at which employees can begin exercising options. You don’t necessarily have to exercise the options on that date; you can exercise the options at a later date. And you don’t have to exercise all of the stock options at the same time either.

Unlike regular stock options that all come due at one time, employee stock options follow a vesting schedule.

Expiration date

Not all shares need to be exercised immediately. But there’s an expiration date by which shares must be exercised. This expiration date is typically 10 years from the date on which the stock option was granted.

Legalese

The option grant is a legal document. As such, it contains a whole series of “What happens if…” conditions.