Options and Warrants
Appraisal Economics is an industry leader in the valuation of stock options and warrants (as well as other complex securities and stock-based compensation). We perform these valuations for a wide variety of purposes, including:
- Financial reporting, principally under ASC 718 (formerly SFAS 123R), IFRS2, and
ASC 505-50 - Gift and estate tax valuations
- Section 409A and other tax-related purposes
We have extensive experience valuing all types of stock options and equity based compensation. Our valuations run the gamut from the most simplistic to the most complex option-like instruments, including the following:
- Plain vanilla stock options
- Warrants (including SPAC warrants)
- Stock options as employee compensation, including incentive stock options (ISOs) or nonqualified stock options (NSOs)
- Public company and private company stock options
- American and European options
- In-the money, at-the-money, out-of-the-money stock options
- Call options and put options
- Exotic options including barrier options, knock-out options, Bermudan options, Asian options, and look-back options
- Performance-based vesting stock options
- Option exchange programs
- Phantom stock and stock appreciation rights (SARs)
- Profit interest units (PIUs)
- Embedded derivatives (discussed in more detail on our complex securities page)
- Synthetic option structures (discussed in more detail on our complex securities page)
In addition to determining the fair value of options, we also offer various other valuation-related services. These include determining derived service periods for options and option-like instruments, estimating expected forfeiture rates, and performing other services.
The valuation of stock options and other types of equity based compensation has become paramount since the implementation of ASC 718 (formerly SFAS 123R). All publicly traded companies are required to expense stock based compensation in accordance with ASC 718. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) agree that the fair value of employee options should be determined as of the date of grant with an option pricing model.
Our valuation professionals are well accustomed to the unique features of employee stock options, which might influence the valuations and other valuation-related services that we perform. In accordance with ASC 718, we consider the following unique characteristics in our valuations of employee stock options: (i) the effects of vesting provisions on the value of the options; (ii) restrictions on the transferability of employee stock options; (iii) if the options qualify as incentive stock options (ISOs) or non-qualified stock options (NQSOs or NSOs) for tax purposes; and (iv) the unusually long duration or time-to-expiration of employee stock options (which requires the estimation of expected volatility and other valuation inputs over extended periods).
To value stock options and warrants, ASC 718 allows the use of the Black Scholes model, a lattice model, or any other model that meets three key criteria. The model must: (i) be applied in a manner consistent with the fair value measurement objective and other requirements of ASC 718, (ii) be based on established principles of financial economic theory as generally applied in that field, and (iii) reflect all substantive characteristics of the grant instrument. We consider a wide range of option valuation techniques and select the appropriate methodology based on a careful review of the characteristics of each security. Our valuation models include:
- Closed form models such as Black-Scholes-Merton
- Lattice models, such as a binomial model
- Synthetic option modeling
- Monte Carlo simulations
Appraisal Economics can help establish appropriate inputs into the option valuation process, such as expected volatility, estimated dividend yield, exercise behavior, expected forfeitures, and estimated security lives. Our assumptions, inputs, detailed computations, and conclusions of value are fully supported by a detailed narrative report suitable for review by independent auditors, the Securities and Exchange Commission, and the Internal Revenue Service.
Whether you need a valuation of plain vanilla stock options and warrants, exotic options and synthetic options structures, or more complex derivative instruments and stock based compensation awards (discussed in more detail on their respective pages), Appraisal Economics can provide fully supported high quality work in a timely and reliable manner.
Appraisal Economics has an experienced team of highly qualified professionals with decades of valuation experience. We provide a full range of valuation services, including purchase price allocations, solvency opinions, portfolio valuations, and business valuations. To learn more about how our team of experts can meet your stock option and other valuation needs, please Contact Us.