Newly Public Companies and the Valuation of Employee Stock Options

This Issue Brief guides practitioners at soon-to-be and newly public companies through two major equity-compensation compliance challenges: 1) selecting an option-pricing model and 2) estimating key input assumptions, particularly expected term and expected volatility.

Because soon-to-be and newly public companies often lack extensive option and stock price data, they are generally required to base valuation assumptions largely on peer-firm data, a requirement complicated by strict FASB criteria concerning the selection of peers. This Issue Brief is relevant to private companies with material stock-based compensation grants, to newly public companies, and to those preparing to go public.

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