Employee Stock Options: Exercise Timing, Hedging, And Valuation

2021-07-29 Business & Economics

Author : Tim Siu-tang Leung
Release : 2021-07-29
Genre : Business & Economics
Kind : eBook
Book Rating : 658/5 ( reviews)

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Book Synopsis Employee Stock Options: Exercise Timing, Hedging, And Valuation by : Tim Siu-tang Leung

Download or read book Employee Stock Options: Exercise Timing, Hedging, And Valuation written by Tim Siu-tang Leung. This book was released on 2021-07-29. Available in PDF, EPUB and Kindle. Book excerpt: Employee stock options (ESOs) are an integral component of compensation in the US. In fact, almost all S&P 500 companies grant options to their top executives, and the total value accounts for almost half of the total pay for their CEOs. In view of the extensive use and significant cost of ESOs to firms, the Financial Accounting Standards Board (FASB) has mandated expensing ESOs since 2004. This gives rise to the need to create a reasonable valuation method for these options for most firms that grant ESOs to their employees. The valuation of ESOs involves a number of challenging issues, and is thus an important active research area in Accounting, Corporate Finance, and Financial Mathematics.In this exciting book, the author discusses the practical and challenging problems surrounding ESOs from a financial mathematician's perspective. This book provides a systematic overview of the contractual features of ESOs and thoughtful discussions of different valuation approaches, with emphasis on three major aspects: (i) hedging strategies; (ii) exercise timing; and (iii) valuation methodologies. In addition to addressing each of these categories, this book also highlights their connections and combined effects of the cost of ESOs to firms, as well as examines the implications to modeling and valuation approaches. The book features a unique approach that combines stochastic modeling and control techniques with option pricing theory, and provides formulas and numerical schemes for fast implementation and clear illustration.

Getting Started In Employee Stock Options

2010-01-14 Business & Economics

Author : John Olagues
Release : 2010-01-14
Genre : Business & Economics
Kind : eBook
Book Rating : 792/5 ( reviews)

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Book Synopsis Getting Started In Employee Stock Options by : John Olagues

Download or read book Getting Started In Employee Stock Options written by John Olagues. This book was released on 2010-01-14. Available in PDF, EPUB and Kindle. Book excerpt: An A to Z guide for understanding employee stock options (ESOs). In Getting Started In Employee Stock Optionsauthors John Olagues and John Summa provide a full understanding of ESOs and demonstrate how to make the most of them. Page by page this author team, a highly experienced options market maker and a professional trader, share essential information that you're probably not hearing anywhere else. This book contains the keys to managing and hedging ESO opportunities in addition to important tax and valuation guidance appropriate for the highest executives to the non-officer managers and the newly arrived employee. Examines essential ESO issues, including tax consequences, risks, and industry pitfalls Written by an experienced pair of stock option experts Enables employees and executives to make more informed decisions regarding their stock options grants Written in a straightforward and accessible style, Getting Started In Employee Stock Options will help protect the value of your options, help you avoid costly mistakes, and allow you to take advantage of certain friendly tax rules. Some of the world's foremost authorities on options have endorsed Getting Started inEmployee Stock Options.

Valuing Employee Stock Options

2004-10-13 Business & Economics

Author : Johnathan Mun
Release : 2004-10-13
Genre : Business & Economics
Kind : eBook
Book Rating : 027/5 ( reviews)

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Book Synopsis Valuing Employee Stock Options by : Johnathan Mun

Download or read book Valuing Employee Stock Options written by Johnathan Mun. This book was released on 2004-10-13. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive guide to understanding the implications andapplications of valuing employee stock options in light of the newFAS 123 requirements Due to the new requirements of the Proposed Statement of FinancialAccounting Standards (FAS 123) released by the Financial AccountingStandards Board (FASB)-namely the fact that employee servicesreceived in exchange for equity instruments be recognized infinancial statements-companies are now scrambling to learn how tovalue and expense employee stock options (ESOs). Based on authorDr. Johnathan Mun's consulting and advisory work with the FASBconsulting projects with several Fortune 500 firms, ValuingEmployee Stock Options provides readers with a comprehensive lookat this complex issue. Filled with valuable information on binomial lattice andclosed-form modeling techniques, Valuing Employee Stock Options canhelp financial professionals make informed decisions whenattempting to ascertain the fair-market value of ESOs under the newrequirements. Johnathan Mun, PhD, MBA, MS, CFC, FRM (San Francisco, CA), is VicePresident of Analytical Services at Decisioneering, Inc., themakers of Crystal Ball analytical software. He is also the authorof Applied Risk Analysis (0-471-47885-7), Real Options Analysis(0-471-25696-X), and Real Options Analysis Course (0-471-43001-3),all of which are published by Wiley.

Early Exercise and the Valuation of Employee Stock Options

2008

Author : Nalin Kulatilaka
Release : 2008
Genre :
Kind : eBook
Book Rating : /5 ( reviews)

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Book Synopsis Early Exercise and the Valuation of Employee Stock Options by : Nalin Kulatilaka

Download or read book Early Exercise and the Valuation of Employee Stock Options written by Nalin Kulatilaka. This book was released on 2008. Available in PDF, EPUB and Kindle. Book excerpt: The Financial Accounting Standards Board has recently endorsed a proposal that will require firms to calculate and recognize as a cost of compensation the value of employee stock options at the time those options are granted. Conventional models such as the Black and Scholes or binomial models, however, are not well suited to deal with the issue of early exercise because the employee options are nontransferrable and therefore may be exercised early when an unconstrained investor ordinarily would sell the option. FASB suggest that employee options be valued using a pricing model with the expected time to exercise replacing the stated maturity of the option, which in fact is its maximum possible life. In this paper we propose a model of option valuation that explicitly accounts for the employee's propensity to exercise option early. In our model, early exercise is based on portfolio diversification motives. Because employee options are not tradable, the only way for employees to diversify portfolios that are heavily dependent on the fortunes of the firm is to exercise their options. Our model shows that FASB's proposal to use conventional pricing model to value options is prone to considerable error. Our major results are: (1) Employee stock options are worth much less than would be suggested by conventional models, even using expected terms as low as one-half the stated option life. (2) Employee stock option values are very sensitive to variables that do not appear in conventional stock option valuation models, such as employee risk aversion or the amount of non-option wealth held by the employee. (3) In contrast to the predictions of conventional pricing models for traded options, the values of employee stock options are likely to fall when stock volatility rises. (4) Values of employee options can be less than the so-called minimum option valuequot; that has appeared in the accounting literature.

Founder’s Pocket Guide: Stock Options and Equity Compensation

2018-10-15 Business & Economics

Author : Stephen R. Poland
Release : 2018-10-15
Genre : Business & Economics
Kind : eBook
Book Rating : 145/5 ( reviews)

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Book Synopsis Founder’s Pocket Guide: Stock Options and Equity Compensation by : Stephen R. Poland

Download or read book Founder’s Pocket Guide: Stock Options and Equity Compensation written by Stephen R. Poland. This book was released on 2018-10-15. Available in PDF, EPUB and Kindle. Book excerpt: This highly visual guide offers startup founders and employees a “nuts and bolts” view of how stock options and other forms of equity compensation work in early-stage startups. Throughout this guide numerous mini-infographics illustrate the key concepts founders need to know and show the relationships between stock option grants, vesting timelines, exercise timing, and associated tax implications. In detail, this Founder’s Pocket Guidewalks entrepreneurs though the following elements: Startup Equity Compensation Basics: Sharing Equity with Your Team The first section of this guide is structured to help founders build a base of understanding about the numerous definitions and terminology related to startup equity compensation and stock options. Topics covered include: · A brief refresher on startup equity in preparation for delving into the details of stock options and other forms of equity compensation. · A quick review of how startup equity ownership is shared between the various stakeholder of a startup including the founders, investors, and employees. · The fundamental mechanics of how startup stock options work, including option grants, exercising, vesting, and selling of stock shares. · A detailed review of equity compensation terminology and definitions, such as vesting, strike price, fair market value, and spread. · An explanation of each of the most common types of equity compensation including Restricted Stock, Incentive Stock Options, Non-Qualified Stock Options, and Restricted Stock Units. Equity Compensation Types in Detail The next section of this guide reviews each of the most common types of equity compensation, including detailed components such as tax implications, vesting and exercise parameters, and other IRS rules governing the ownership of each equity type. The following equity compensation types are covered: · Restricted Stock (RS) · Incentive Stock Options (ISOs) · Early Exercise Incentive Stock Options (EE-ISOs) · Nonstatutory Stock Options (NSOs) · Early Exercise Nonstatutory Stock Options (EE-NSOs) · Restricted Stock Units (RSU) Establishing Your Startup’s Equity Plan In the final part of this guide we dig deeper into the key areas founders need to consider when developing an equity plan for their startup, with specific focus on the following issues: · When to implement a formal equity incentive plan · What factors to consider when deciding how large the equity compensation pool should be · How to decide employee equity award amounts at the different stages of a startup’s lifecycle · What general steps to take to establish a equity compensation plan for your startup · What key information that must be communicated to employees about equity compensation awards · Which step-by-step calculations are needed to truly understand equity ownership percentages and value · How IRS and SEC rules impact private company equity compensation

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