Equity-Based Compensation

& Stock Options

Stock options are often used as part of the purchase price in the acquisition of businesses, and are routinely issued to management as part of a stock option plan. To accurately account for the issuance of options and warrants, a fair value estimate may be required as prescribed in ASC 718 (precodification SFAS No. 123R). When nonqualified deferred compensation plans involve stock or stock options in closely-held businesses, a valuation may be required for tax purposes under 409A.

 

A common mistake in determining the strike price of an option is the arbitrary use of a company’s book value, or pricing based on a recent capital raise that involved preferred stock or favorable deal-terms. For companies planning an initial public offering, the inappropriate pricing of options in prior years may require a restatement of earnings, which is commonly known as a “cheap stock” issue.

 

These pitfalls can be avoided by having a comprehensive independent appraisal of the underlying stock to ensure that options are issued with a strike price that is not below fair value.  At FairValue Advisors, we provide valuations to address both the tax and financial reporting requirements associated with Stock Options and more complex derivatives.

 

In today’s world, capital structures are becoming increasingly complex. At FairValue Advisors, we use the most modern and accepted valuation methodologies. For valuations involving complex capital structures, we employ the option pricing model (“OPM”) and the probability weighted expected return model (“PWERM”) as prescribed by the AICPA Practice Aid, as well as Monte Carlo simulation when appropriate.

At FairValue Advisors, our appraisals are used to assist with the issuance of stock options and for the accounting for complex capital structures.

Valuation Projects

A defense contractor was appraised by FairValue Advisors for evaluation by a private equity firm.

April 18, 2019

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