While the Black-Scholes model continues to be the most common method of valuing employee stock options, the binomial method is becoming more prevalent, according to Anthony Banks (Marcum LLP).

More flexible: The binomial model is a lattice-based model that is more flexible than the Black-Scholes model, Banks explained during a recent BVR webinar. The Black-Scholes model cannot be modified for vesting, turnover, or early exercise (suboptimal exercise behavior). But these assumptions can be incorporated into the binomial method, he points out.

Also, the SEC has indicated that the binomial model is the preferred model for stock warrants, according to Banks. However, if the company does not have any history of suboptimal exercise behavior, you have the safe harbor provision provided by page 36 of the SEC Staff Accounting Bulletin 107 (SAB 107) that allows you to use the Black-Scholes model and average the term and the vesting period.

Workable Excel files: Webinar participants were given several working Excel files that demonstrate how to apply the binomial method to valuing ESOs. To access an archived version of the webinar that includes the working Excel files, click here.