Perhaps the Black Scholes model has a fudge factor built into it that estimates a percentage of options will go unvested, but I really don't know. I suspect Ron, the fellow that has the employee stock option thread, understands the math pretty well behind Black Scholes. Ron appears to go through an actual calculation in the following post on his thread. I haven't tried duplicating it myself yet.
This is all very nitpicky, so I hope that most people are ignoring this ;), but black scholes assumes that every option that's in the money at expiration will be exercised. This isn't the case with employee stock options, as some of them "die" before expiration.
Simply put, if I have an option to buy a share of XYZ for $10 a share, I'll never throw it away. Even if the stock is at $2 a share, I'd sell it to somebody for some number of pennies if I didn't want it any more; that way, if the price rebounds to $15, the option will get exercised. However, if I'm an employee of XYZ corp, and I have 1000 options priced at $10 a share, and the price is at $5, I may leave the company for some reason, and those options will never get exercised (since they will be cancelled once I leave). So the value of that option is somewhat less than with the "normal" option. I have fewer outs, in poker terms.
Ethan |
