The Black-Scholes formula for valuing options granted in-house lawyers

Some compensation surveys gather data about the amounts awarded in-house lawyers for stock options and restricted stock grants. Yet many law department managers don’t understand how accountants can place a value on those equity awards.

To value a call option, many people use the Black-Scholes formula. That formula uses five inputs: the stock’s price, the option exercise price, the time to expiration, the risk-free interest rate, an the standard deviation of stock returns [Economic Approaches to Intellectual Property: Policy, Litigation, and Management (NERA Econ. Consulting 2005, at 322)].

Quite similar inputs are used for valuing a real option (See my post of Dec. 20, 2005.)