Employee Stock Options and Equity Valuation

Employee stock options have become a large component of compensation for many companies, especially those in which human capital forms a large portion of company assets. In this monograph, I address how to value the equity of companies that grant employee options. I discuss prior research on employee stock options, focusing on the implications for a discounted cash flow model that begins with free cash flow, and introduces costs associated with current and future options as well as the incentive benefits of granting options