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Expected term of stock option for valuation

expected term of stock option for valuationHow does a company without history of option exercises estimate the expected term of stock options for valuation and accounting?

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Arik Van Zandt
Title: Senior Director
Company: Alvarez & Marsal Valuation Services
(Senior Director, Alvarez & Marsal Valuation Services) |

For the estimating the fair value of employee stock options under ASC 718, the expected term can be estimated using the simplified method detailed in SEC Staff Accounting Bulletin No. 107 (SAB 107) when the options are “plain vanilla” and the company does not have any historical post-vesting activity. The simplified method calculates the expected term as mid-point between the weighted-average time to vesting and the contractual maturity. For example, a stock option grant with a 4-year vesting period with 25% of the shares vesting each year and a 10-year contractual term would have an expected term of 6.25-years utilizing the simplified method under SAB 107 [((1 * 25% + 2 * 25% + 3 * 25% + 4 * 25%) + 10) / 2].

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