THE BARATELLI INSTITUTE · Mentoring at Scale
SBC VALUATION SUITE · FOR EARLY-EXERCISE + TURNOVER AWARDS

Binomial lattice option valuer (Cox-Ross-Rubinstein)

Black-Scholes assumes options are held to expiry and never forfeited. Real employee options are different: holders exercise early when the option is sufficiently in-the-money, and a meaningful fraction of options are forfeited each year as employees leave before vesting. The CRR binomial lattice prices both behaviors explicitly — producing a fair value that is typically lower than Black-Scholes by 10-25%, and that is the number an auditor will accept for awards where early exercise + turnover are documented.

CRR tree
Configurable steps
Early exercise
Multiple of strike trigger
Turnover
Annual forfeiture rate
vs. B-S
Comparison built in
STAGE 1 OF 4

Current stock price and strike

$
Closing price on grant date (public) or 409A FMV (private).
$
Set at grant by the board, typically at-the-money.
STAGE 2 OF 4

Volatility, risk-free rate, dividend, term

%
%
%
The full contractual life. Lattice models the contractual term — early exercise truncates value within the tree.
STAGE 3 OF 4

Employee behavior and grant size

Empirically observed early-exercise behavior and annual employee turnover. SEC guidance accepts both inputs when supported by historical data.

Employees typically exercise when the stock reaches roughly this multiple of strike. 2.0x is a widely-cited mid-point; calibrate to your option-administration data.
%
Annual rate at which post-vest holders forfeit unexercised options (e.g., 90-day exercise window expires unexercised after departure).
50 is typical for production; higher = smoother but slower. CRR converges as n → ∞.
Why early exercise + turnover make Black-Scholes overstate fair value. Black-Scholes assumes the option is held until expiry. Real employees exercise early (chopping off the upside tail) and a fraction leave before exercising (eliminating value entirely). Both effects truncate option value — the lattice captures both directly.
STAGE 4 OF 4

Lattice fair value vs Black-Scholes

WANT THE METHODOLOGY BEHIND THIS TOOL?
Read more in the CFO Guide.
The tool gives you the answer. The guide gives you the argument — the case law, the worked examples, the negotiation playbook, the cross-check tables, the exception cases.
The methodology behind this calculator is in Ch 19 Stock-Based Compensation of the reference guide.
Read more in the CFO Guide → Browse all 22 guides