Black-Scholes fair value for employee stock options

The price of one share on the day the award was granted. Public companies usually use the closing price on the grant date; using the average of the high and low is also acceptable if you apply it consistently and say so. Private companies use the fair value from a recent 409A valuation, dated close enough to the grant to still be reasonable.

The price the holder pays to exercise, taken straight from the award agreement. Most option grants are struck at the money, so this equals the share price above. Granting below fair value creates 409A exposure for the employee and changes the accounting, so a discount is worth confirming rather than assuming.

How long the options are expected to stay outstanding, which is not the 10-year contractual term. If you have no exercise history, the simplified method under SAB 107 and SAB 110 takes the midpoint between the weighted-average vesting period and the contractual term: four-year annual vesting plus a 10-year term gives 6.25 years. It only applies to plain vanilla awards, and only until you have enough history of your own.

The annualized standard deviation of your share price returns, measured over a period roughly matching the expected term. Pull daily or weekly closing prices, compute log returns, take the standard deviation, and annualize. If you went public recently and lack that much history, use a peer group with written selection criteria you would still apply the same way next quarter.

The yield on a zero-coupon U.S. Treasury whose remaining term matches your expected term, as of the grant date. Treasury publishes constant maturity yields daily; for a 6.25-year term you interpolate between the 5-year and 7-year points. Use the grant date, not quarter end.

Annual dividends per share divided by the share price, expressed as a percentage. Enter zero if you pay no dividends and have no plan to start, which is the case for most companies granting options. Document that basis rather than leaving the zero unexplained.

The number of shares the award covers. Fair value per option does not change with this figure, so total cost scales in a straight line: double the options and you double the expense.

The requisite service period the employee must complete. This calculator spreads total cost evenly across it. If your awards vest in annual tranches and you use graded attribution instead, year one expense is materially higher than shown here.