Your Selection

The Your Selection tab in the Assumptions Module provides a convenient and organized summary of every aspect of the assumption derivation analysis that you have calculated and saved. Each of the valuation assumptions necessary for the different valuation techniques and actual quantitative numbers that you derived for each of the inputs will be stored in this section.

Assumption Scenarios represent a repository or storage medium for assumptions. Each of the different valuation assumptions needed for the different valuation techniques are stored as assumption scenarios. One of the primary purposes of storing input scenarios is so you can utilize them throughout the application, and in particular, while valuing your options. Additionally, since these assumption scenarios contain the required valuation model inputs, they are used specifically on the Valuations and Hypotheticals pages.

- Black-Scholes-Merton Formula values the option using an expected term rather than the full term from grant date to expire. The formula incorporates a projection of stock prices into the future, assuming a lognormal random walk, and a discounting of these estimates using the prevailing risk-free interest rate while accommodating dividend payments.

- Lattice Barrier incorporates a calibration process that identifies which barrier level (or sub-optimal exercise factor) best explains the observed historical option holding period and the in-the-money ratio at exercise. Through this process, the model is best fit to capture employees’ tendencies and exercise behavior from the company’s historical data and actual exercise behavior observed over the last few years, and apply that forward to new grants though the use of a barrier (or sub-optimal exercise factor).

- Hull-White II Lattice Model is an extension of Hull-White I, which posits that employees exercise their options upon reaching a target (threshold) in-the-money level. The inherent elegance of Hull-White I (or any simple lattice barrier model), is that exercises are conditioned to the evolution of the stock price, not solely the time period. With the Hull-White II Lattice Model, a time distribution of exercises occurs at many in-the-money levels, conditional on vesting and remaining options outstanding. This creates a probabilistic barrier which moves over time (across nodes) and is fitted against historical behavior. At every node, some fraction of the option is exercised based on the probability distribution. A regression is implemented to derive the probability of exercise per month for vested options. Hull-White II is data-driven, and when robust and fitted effectively, forecasts employee exercise behavior in a way that tightly captures the economic costs of an option grant over its life.

- Expected Term as a Holding Period is predicted internally in the model and is based on your exercise and cancellation data (through the fitting parameters). Expected term as a holding period estimates the length of time your company’s options will remain outstanding from the time of grant to extinction. Extinctions of grants may include post-vesting cancellations, out-of-the-money expirations, or exercises.

- Expected Term as a Time-To-Exercise is predicted internally into the model and is based on your exercise and cancellation data (through the fitting parameters). Expected term as a time-to-exercise estimates the length of time your company’s options will remain outstanding from the time of grant to being exercised.

The ability to value each vesting increment, or tranche, using a multiple option approach is provided. A valuation by vesting tranch refers to breaking an option grant into sub options - based on the different vesting instances. Each vesting tranche is a sub option that is expensed on a stand-alone basis. When valuing options by vesting tranche, option value results are saved and displayed for each vesting increment.

- Lattice Models: When valuing options by vesting tranche, the idea is to break up this option into several sub-options, such that each sub-option has one vesting date only (essentially creating sub-options with cliff vesting schedules). And while the number of shares vesting on that date remains equal as before, the number of options granted for the new sub-option equals the number of shares vesting. Other inputs and characteristics of the option remain the same. When users value by vesting tranche for Lattice Models, the actual time-to-vest for each tranche is calculated and used as an input into the Lattice Model. Each tranche is valued separately and option values will be saved for each grant’s vesting tranche.

- Black-Scholes-Merton: The expected term from vest is used as an input into the Black-Scholes-Merton Formula when users value their options using a multiple option approach. For each vesting tranche, the time-to-vest is calculated, using the difference in years between the grant date and the vesting date. The actual time-to-vest for each vesting tranche is added to the expected term from vest to be used as an input in to the Black-Scholes-Merton Formula. Each tranche is valued separately and option values will be saved for each grant’s vesting tranche.

Note: Only the relevant assumption categories that pertain to your selections are displayed. As a result, your stored input scenarios from the assumption module can be immediately accessible and applied.

- Click the Edit link located under the Action header in the Save Assumptions Scenario section at the bottom of the page. You can further customize the scenario by inputting user-created input assumptions that have been developed outside of the Assumptions Module environment, or if using a Lattice valuation technique, apply varying volatility, risk-free rate and dividend yield assumptions.