Stock Option Valuation
Valuation Advisors to help you comply with complex IRS and Financial Reporting Rules.
Whether you’re a private or public company, granting stock options requires a valuation of both the options and the underlying stock. This can be a tricky area with both tax and accounting implications. It’s an area that the Fesnak valuations team specializes in, and can help you navigate.
For tax purposes (IRC 409A), companies must be careful that options are not granted “in-the-money” (where the exercise price is less than the underlying stock value subject to the options). If this occurs, there are adverse tax consequences not only to the company granting the options but also to the recipient of the options. In order to determine the underlying stock value, an overall enterprise valuation is first necessary. Lack of control and marketability of the stock subject to the options, among other items, must then be considered in order to arrive at the per share value of the stock. In complex capital structures, an allocation of value using equity allocation methodologies is necessary to determine the appropriate value of the stock subject to the options.
For financial reporting purposes (ASC 718), the value of the stock options granted must be recorded as compensation expense on the income statement of the company. To determine the value of the stock options, an appropriate option pricing model must be selected. In many cases this may be the Black-Scholes-Merton or Lattice pricing models which require certain inputs, such as the underlying stock price, exercise/strike price, time to expiration, volatility, risk-free rate and dividend rate. We use option pricing software to efficiently determine stock volatility and to calculate the value of stock options using these models. After the value of the stock options is determined, factors such as vesting periods and forfeiture rates come into play in order to record the appropriate expense on the income statement. We can assist you not only with the valuation of the options, but with the accounting requirements as well.
Whether you’re a private or public company, granting stock options requires a valuation of both the options and the underlying stock. This can be a tricky area with both tax and accounting implications. It’s an area that the Fesnak valuations team specializes in, and can help you navigate.
For tax purposes (IRC 409A), companies must be careful that options are not granted “in-the-money” (where the exercise price is less than the underlying stock value subject to the options). If this occurs, there are adverse tax consequences not only to the company granting the options but also to the recipient of the options. In order to determine the underlying stock value, an overall enterprise valuation is first necessary. Lack of control and marketability of the stock subject to the options, among other items, must then be considered in order to arrive at the per share value of the stock. In complex capital structures, an allocation of value using equity allocation methodologies is necessary to determine the appropriate value of the stock subject to the options.
For financial reporting purposes (ASC 718), the value of the stock options granted must be recorded as compensation expense on the income statement of the company. To determine the value of the stock options, an appropriate option pricing model must be selected. In many cases this may be the Black-Scholes-Merton or Lattice pricing models which require certain inputs, such as the underlying stock price, exercise/strike price, time to expiration, volatility, risk-free rate and dividend rate. We use option pricing software to efficiently determine stock volatility and to calculate the value of stock options using these models. After the value of the stock options is determined, factors such as vesting periods and forfeiture rates come into play in order to record the appropriate expense on the income statement. We can assist you not only with the valuation of the options, but with the accounting requirements as well.
Representative Cases
BIOTECH COMPANY
STAFFING COMPANY
LIFE SCIENCE COMPANY
CONSTRUCTION COMPANY
Valued Common Stock and Stock Options for an early stage biotech company with a complex capital structure to help client comply with federal tax requirements of IRC 409A and financial reporting requirements of ASC 718.
STAFFING COMPANY
Valued Common Stock and Stock Options for an established company in the staffing industry to help client comply with federal tax requirements of IRC 409A and financial reporting requirements of ASC 718.
LIFE SCIENCE COMPANY
Valued Stock Options of a publicly traded life science company to help client comply with financial reporting requirements of ASC 718.
CONSTRUCTION COMPANY
Valued Executive Stock Options granted by a $2.5 billion revenue publicly traded construction company for gift and estate tax purposes.
