ESOP Valuation

Black-Scholes vs Binomial Model for ESOP Valuation

Sagar Shah

September 1, 2026

Black-Scholes vs Binomial Model for ESOP Valuation

Key Takeaways:
What Does Ind AS 102 Require for ESOP Valuation?
How Does the Black-Scholes Model Work?
How Does the Binomial Model Work?
What Is the Key Difference Between the Models?
When Is Black-Scholes Better for ESOPs?
When Is the Binomial Model Better?
Which Inputs Matter Most in Either Model?
How Do the Models Compare in a Practical Example?
How Should Unlisted Companies Select a Model?
What Documentation Should Support the Valuation?
Closing Summary: Choose the Model That Fits the ESOP
Frequently Asked Questions — ESOP Models

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This is a supporting guide to our ESOP in India: Design, Valuation, Tax & Strategy Guide. For the broader legal, tax, accounting and scheme-design framework, start with the pillar guide and use this article for model selection in grant-date option Valuation.

For many finance teams, Black-Scholes vs Binomial ESOP Valuation looks like a choice between a simple model and a sophisticated model. That framing is incomplete. The real question is whether the selected model captures the economic characteristics of the employee stock option being valued. A model can be mathematically advanced and still be inappropriate if its assumptions do not match the ESOP terms or employee exercise behaviour.

Under Ind AS 102, Share-based Payment, employee options generally do not have observable market prices because they carry restrictions and conditions that are different from exchange-traded options. The company therefore estimates the grant-date fair value using an option pricing model. Ind AS 102 specifically recognises that long-lived employee options, early exercise and changing assumptions can make a flexible model relevant, while Black-Scholes-Merton may still produce substantially the same value for simpler or shorter-lived options.

That distinction matters for Indian startups, unlisted companies and listed groups because the selected model affects the grant-date option fair value and therefore the share-based payment expense recognised over the vesting period. At Elite Valuation, our IBBI Registered Valuer team treats model selection as a facts-and-circumstances decision: first understand the ESOP scheme, then determine which model represents the award with the least unnecessary complexity and the strongest supportable assumptions.

Key Takeaways:

Ind AS 102 does not prescribe one mandatory option pricing formula. The selected model should reflect the substantive characteristics of the ESOP award.
Black-Scholes-Merton is usually efficient for relatively simple options where early exercise can be represented through a single expected-life assumption.
The Binomial Model is more flexible because it can model exercise at different points in time and can accommodate changing assumptions across the contractual term.
For simple terms, the two models should converge closely when calibrated to equivalent assumptions and a sufficiently fine Binomial lattice.
Input quality matters more than model complexity. Weak volatility, expected-life or share-value assumptions can distort either model.
For unlisted companies, the underlying equity Valuation is a separate critical input. An IBBI Registered Valuer can support the equity Valuation and broader ESOP Valuation workstream where applicable.
Use the simplest model that faithfully captures material award features. Complexity should solve a real Valuation problem, not merely make the report look more technical.

What Does Ind AS 102 Require for ESOP Valuation?

Ind AS 102 requires a company to estimate the fair value of employee share options when an observable market price for comparable options is not available. This is common because employee options are normally non-transferable, cannot be exercised before vesting, may lapse on cessation of employment and often remain exercisable for a period after vesting. These features distinguish ESOPs from standard exchange-traded options.

The standard does not say that every company must use Black-Scholes or that every company must use a Binomial lattice. Instead, the company selects an option pricing model that reflects the factors knowledgeable market participants would consider. At a minimum, the model must capture the exercise price, option life, current price of the underlying share, expected share-price volatility, expected dividends where relevant and the risk-free interest rate.

Quick Answer: What is Ind AS 102 really asking?

Ind AS 102 is not a model-prescription standard. It is a fair-value measurement standard for share-based payments. The company must select an option pricing model that reflects the award's material economic terms and use supportable inputs. Model selection is therefore part of the Valuation judgement, not a mechanical compliance checkbox.

Ind AS 102 also addresses expected early exercise. Employee options are often exercised before expiry because employees cannot sell the option itself, may need to exercise after leaving employment, or may prefer to lock in value rather than remain exposed to the company's share price. Under a Black-Scholes-Merton approach, expected early exercise is generally reflected through an estimated expected life. Under a Binomial or similar lattice approach, the company can model early exercise across the contractual life at different nodes.

This is why a technical ESOP Valuation should begin with the scheme document and grant terms rather than with a spreadsheet model. The Valuer or finance team should understand vesting, contractual expiry, exercise windows, leaver provisions, employee categories, dividend rights and any historical exercise pattern before deciding which model is appropriate.

How Does the Black-Scholes Model Work?

The Black-Scholes-Merton model is a closed-form option pricing model. It converts a small set of assumptions into a single option value using a defined mathematical formula. In ESOP Valuation, it is popular because the model is transparent, computationally efficient and easy to review. For a large population of plain-vanilla grants, this can be a significant practical advantage.

For an employee option, the model does not normally use the contractual term mechanically. It uses an expected life that reflects the period from grant date to expected exercise. This is important because employees frequently exercise before contractual expiry. The expected-life estimate effectively compresses employee exercise behaviour into one weighted-average time assumption.

BLACK-SCHOLES-MERTON — ESOP CALL OPTION

Option Value = S × e−qT × N(d1) − K × e−rT × N(d2)

WHERE:

S = Fair value of the underlying equity share at the grant date

K = Exercise price of the option

T = Expected life of the employee option

σ = Expected volatility of the underlying share

r = Risk-free interest rate for the relevant term

q = Expected dividend yield

N(.) = Cumulative standard normal distribution

INTERMEDIATE TERMS:

d1 = [ln(S/K) + (r − q + 0.5σ²) × T] ÷ [σ × √T]

d2 = d1 − σ × √T

The model produces one grant-date fair value per option from these weighted-average assumptions.

The strength of Black-Scholes is also its limitation. The model assumes a single expected life and typically uses constant weighted-average assumptions for volatility, dividends and the risk-free rate over that life. If the award's economics can be represented reasonably through those averages, the model works well. If employee exercise behaviour changes materially at different share-price levels or the contractual term is long enough for assumptions to vary significantly, those simplifications can become important.

Practical Valuation Insight

For many Indian startup ESOPs, the hardest Black-Scholes input is not the mathematical formula but expected volatility. An unlisted company has no traded share-price history, so volatility is generally supported using listed comparable companies with a documented peer-selection basis and an observation period that is relevant to the option's expected life.

How Does the Binomial Model Work?

The Binomial Model, often called a lattice model, divides the option term into multiple time steps. At every step, the underlying share price is assumed to move up or down by specified factors. The model builds a tree of possible future share-price paths and works backwards through the tree to determine the current option value.

This structure creates the key advantage: the model can apply different assumptions or exercise rules at different points in the option's life. Instead of summarising early exercise into one expected-life number, the model can assume that employees exercise once the option is vested and the share price reaches a specified multiple of the exercise price. It can also incorporate different exercise patterns for groups of employees if reliable information supports that distinction.

A commonly referenced employee-option extension is the Hull-White Binomial model for ESOPs. In this framework, post-vesting exercise can be triggered when the underlying share price reaches a specified multiple of the exercise price. That multiple is often described as a sub-optimal exercise factor because employees may rationally exercise before contractual expiry due to non-transferability, liquidity needs, diversification or employment-related constraints. The factor should not be inserted mechanically: it should be supported by the company's exercise history or other defensible behavioural evidence. Not every Binomial ESOP model is a Hull-White model, but the terminology is useful where the lattice explicitly incorporates a share-price-based early-exercise boundary.

BINOMIAL LATTICE — CORE MECHANICS

At each time step: Share Price moves to S × u or S × d

BASIC PARAMETERS:

Δt = Contractual term ÷ number of lattice steps

u = Up-factor applied to the share price

d = Down-factor applied to the share price

p = Risk-neutral probability used in the lattice calculation

VALUATION LOGIC:

Step 1 = Build possible share prices through the contractual term

Step 2 = Apply exercise or continuation rules at relevant nodes

Step 3 = Discount expected option values backwards through the tree

The present value at the first node is the estimated grant-date option fair value.

The number of steps matters. A very coarse tree can produce unstable results, while a sufficiently fine lattice converges toward the continuous-time result for a simple option. The objective is not to maximise the number of steps without reason; it is to use enough steps to represent the award accurately and achieve numerical stability.

A lattice is particularly useful when the option has a long contractual life and exercise is possible over a broad period after vesting. Ind AS 102 specifically notes that many employee options are long-lived and exercised early, and that these features may make Black-Scholes-Merton less suitable where a single weighted-average assumption cannot represent the economics adequately.

What Is the Key Difference Between the Models?

The practical difference is not that Black-Scholes is “basic” and Binomial is “advanced.” The difference is how the models represent time, employee behaviour and award conditions. Black-Scholes collapses the award into one expected term with weighted-average inputs. A Binomial model represents the option across multiple time steps and can make exercise dependent on conditions at each step. For complex market-based vesting conditions—particularly relative Total Shareholder Return (TSR) hurdles or other path-dependent outcomes—Monte Carlo ESOP Valuation often becomes the more practical third model in the decision set.

Area	Black-Scholes-Merton	Binomial / Lattice	Monte Carlo
Model type	Closed-form formula	Multi-step tree / lattice	Simulation of many possible share-price paths
Time assumption	Single expected life	Usually uses contractual life across many steps	Simulates the relevant performance and measurement period path-by-path
Early exercise	Reflected indirectly through expected life	Can be modelled directly at eligible nodes, including exercise-multiple rules	Can be incorporated, but is not normally the main reason to select Monte Carlo
Volatility / rates	Generally weighted-average inputs	Can vary over the option term	Can incorporate multiple stochastic variables and correlations where required
Graded vesting	Typically requires separate calculations for each vesting tranche when each tranche has a different expected life	Can represent vesting and exercise eligibility through the lattice timeline	Usually unnecessary for service-only graded vesting unless another feature independently requires simulation
Market-based vesting conditions	Not designed to capture complex path-dependent market conditions	Can address some market-linked structures, depending on design	Often preferred for relative TSR, absolute TSR and other path-dependent market hurdles
Employee groups	Often handled through separate calculations or weighted assumptions	Can incorporate different exercise behaviour within the lattice framework	Can simulate group-specific assumptions where materially relevant, but at greater complexity
Transparency	Very high; inputs and formula are easy to trace	Requires stronger documentation of lattice design and exercise rules	Requires clear documentation of simulation logic, correlations, performance conditions and convergence
Best fit	Simple awards with supportable average assumptions	Long-lived or behaviour-sensitive awards	Complex market-linked or path-dependent awards, especially TSR hurdles

Decision Principle

Choose Black-Scholes when one expected-life assumption reasonably captures employee exercise behaviour.
Choose a Binomial lattice when the timing of exercise itself is a material Valuation feature that should be modelled explicitly.
Do not choose a model merely because it produces a lower or higher ESOP expense.

When Is Black-Scholes Better for ESOPs?

Black-Scholes is generally a strong choice where the award is simple enough that weighted-average assumptions provide a faithful representation. This often includes a fixed exercise price, standard time-based vesting, no complex path-dependent feature, a reasonably supportable expected-life estimate and an exercise window that is not excessively long.

It is also useful when a company is establishing its ESOP accounting process for the first time and has limited historical exercise data. A Binomial model requires assumptions about how employees will behave at different share-price levels. If the company has no reliable basis for those assumptions, the lattice can create an appearance of precision without improving the economic estimate.

Graded vesting under Ind AS 102 needs a separate accounting lens even when Black-Scholes is the appropriate pricing model. Where, for example, 25% of an option grant vests at the end of each of four years, the graded-vesting award is treated in substance as multiple awards. In practice, a Black-Scholes approach therefore involves tranche-by-tranche Valuation: each vesting tranche is valued separately using an expected life appropriate to that tranche, while the resulting compensation cost for each tranche is recognised over its own vesting period. Because the earlier tranches are fully expensed sooner, the combined charge is generally accelerated or front-loaded compared with spreading the total grant-date fair value evenly over the final four-year vesting period. Graded vesting does not, by itself, mean that a Binomial model is required; it means the Black-Scholes calculation and expense attribution should respect the separate economics and vesting period of each tranche.

Black-Scholes is usually appropriate when:

The ESOP has standard terms; early exercise can be represented through a single expected life; volatility, dividend yield and risk-free rate can reasonably be treated as weighted-average assumptions; and there is no material condition requiring path-by-path modelling.

For unlisted companies, Black-Scholes also has an operational advantage. Auditors and finance teams can trace the option value directly to the underlying equity value, exercise price, volatility, expected life, risk-free rate and dividend yield. An IBBI Registered Valuer supporting the underlying equity Valuation can therefore provide a clear audit trail from company Valuation to option Valuation, while the accounting team separately evaluates the Ind AS 102 expense recognition.

However, “commonly used” should not be mistaken for “automatically correct.” A company with a ten-year contractual life, wide exercise window and mature employee exercise history should not continue using the same simplified expected-life assumption merely because Black-Scholes was used in prior years. Model choice should be reassessed when the scheme or the evidence changes.

When Is the Binomial Model Better?

A Binomial model becomes more compelling when exercise timing is not well represented by one average expected term. Employee options frequently contain behavioural features that are different from market-traded options. Employees cannot normally sell the option, may be required to exercise vested options shortly after leaving, and often exercise when the share price reaches a level they consider attractive rather than waiting until expiry.

If the company has credible historical data showing that employees tend to exercise when the share price reaches, for example, a certain multiple of the exercise price, a lattice can apply that exercise rule at every eligible node after vesting. This directly links the employee's exercise behaviour to the evolving share price instead of forcing that behaviour into a single expected-life estimate.

Caution: Flexibility can become false precision

A Binomial model needs more assumptions than Black-Scholes. Exercise thresholds, employee grouping, time steps and changing input curves should be supported by evidence. A complex lattice built on arbitrary assumptions can be less reliable than a simpler model with strong inputs. The model should become more complex only when the award economics justify it.

The lattice may also be preferable when expected volatility, risk-free rates or dividend assumptions are expected to vary materially over a long contractual term. Instead of using one average assumption, the model can incorporate a term structure or changing expectation. This does not mean every long-dated ESOP requires a Binomial model; it means the company should determine whether the variation is material enough to affect the fair value estimate.

Where an award includes material market-based vesting conditions, neither a standard Black-Scholes calculation nor a simple Binomial tree should be forced onto the instrument. Monte Carlo ESOP Valuation is commonly used for relative TSR, absolute TSR and other path-dependent hurdles because the model can simulate many possible share-price paths—and, where relevant, correlated peer-company paths—over the performance period. A lattice may still be capable of handling some market-linked structures, so Monte Carlo is not automatically mandatory. The governing principle remains the same: the Valuation technique should reflect the substantive characteristics of the award and the condition being measured.

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Which Inputs Matter Most in Either Model?

Model selection attracts attention, but the larger source of Valuation error is often the inputs. Both Black-Scholes and Binomial models require a defensible underlying share value, exercise price, volatility assumption, risk-free rate and dividend expectation. Employee exercise assumptions then determine how the option term is reflected.

Input	Why It Matters	Common ESOP Issue
Underlying share value	Sets the starting economic value of the option	Using an outdated funding-round price or a share value prepared for a different purpose without evaluating comparability
Exercise price	Determines intrinsic value and moneyness	Mismatch between scheme document, grant letter and model input
Expected volatility	Higher volatility generally increases option value	Weak peer selection, inconsistent observation periods or use of index volatility as a substitute for company risk
Expected life / exercise behaviour	Controls how long employees are expected to retain option upside	Using contractual life automatically in Black-Scholes or using arbitrary exercise thresholds in a lattice
Risk-free rate	Reflects the time value of the exercise-price payment	Using a rate with a tenure inconsistent with the expected or contractual term represented by the model
Dividend yield	Expected dividends reduce the value of an option where option holders do not receive them before exercise	Assuming zero without checking the company's dividend history or stated distribution policy

For an unlisted company, expected volatility deserves special attention because there is no observable share-price history. A comparable-company approach should focus on businesses with relevant operating risk, scale and market exposure. The historical return period should also be considered in relation to the expected option term. The objective is not to search for the volatility that produces a preferred expense; it is to estimate the volatility a market participant would expect for the underlying share.

The underlying share value is equally important. The option pricing model does not value the business from first principles; it takes the fair value of the underlying share as an input. That equity Valuation should therefore be contemporaneous with the grant-date measurement and consistent with the rights of the security underlying the ESOP. Where appropriate, an IBBI Registered Valuer should support this underlying Valuation with a documented methodology and assumptions.

How Do the Models Compare in a Practical Example?

Consider a simplified ESOP grant solely to illustrate model mechanics. Assume the underlying share value is Rs. 100, the exercise price is Rs. 100, expected life is 5 years, expected volatility is 35%, the risk-free rate is 7% and expected dividend yield is 0%. We first value the option using Black-Scholes-Merton and then use a standard Cox-Ross-Rubinstein Binomial lattice with the same five-year maturity and no special early-exercise behaviour.

ILLUSTRATIVE CASE — SAME ECONOMICS, TWO MODELS

This example is designed to demonstrate convergence for a plain option. It does not represent a company-specific ESOP opinion and does not incorporate employee-specific exercise behaviour, leaver rules or changing assumptions.

BLACK-SCHOLES — ILLUSTRATIVE CALCULATION

S = Rs. 100 | K = Rs. 100 | T = 5.0 | σ = 35% | r = 7% | q = 0%

CALCULATION:

d1 = 0.8385

d2 = 0.0559

Black-Scholes Fair Value ≈ Rs. 43.11 per option

Binomial Steps	Estimated Option Value	Difference from Black-Scholes
10 steps	Rs. 42.43	Rs. (0.68)
50 steps	Rs. 42.97	Rs. (0.14)
100 steps	Rs. 43.04	Rs. (0.07)
500 steps	Rs. 43.09	Rs. (0.02)
1,000 steps	Rs. 43.10	Rs. (0.01)

The example demonstrates an important point: when the economic assumptions are equivalent and the option is simple, the Binomial value converges closely to the Black-Scholes value as the lattice becomes finer. A materially different output does not arise merely because the Binomial model is “more sophisticated.” It arises when the lattice is used to represent additional features such as early exercise, changing assumptions or employee behaviour that are not represented in the same way by Black-Scholes.

For an actual ESOP, a company might use the contractual term in a lattice and model exercise after vesting once the share price reaches a specified level. The resulting option value may differ from a Black-Scholes value using one expected-life input. The difference is then caused by the different representation of exercise behaviour, not by mathematical inconsistency.

What the Illustration Proves

Do not select a model by comparing two unexplained outputs and choosing one. First align the assumptions and understand which ESOP features each model is capturing. For a plain award, convergence is expected. For a behaviour-sensitive award, divergence can be economically justified.

How Should Unlisted Companies Select a Model?

Unlisted companies face an additional layer because the option model needs a fair value for the underlying share even though no market quotation exists. The company therefore has two linked but distinct Valuation questions: what is the fair value of the underlying equity share? and what is the fair value of the employee option over that share?

The first question is an equity Valuation exercise. Depending on the purpose and applicable legal framework, the company may require a report from an IBBI Registered Valuer. The second question is an option-pricing exercise under the relevant accounting framework. Mixing the two can create confusion. A strong ESOP file clearly documents the underlying share value and then shows how that value is used as an input into the selected option model.

For model selection, the company should work through the following sequence. First, read the ESOP scheme and grant letter to identify vesting, expiry, exercise windows and leaver provisions. Second, assess whether employees can exercise over a wide period after vesting. Third, determine whether the company has credible historical exercise data. Fourth, evaluate whether volatility, interest rates or dividends need to vary over the term. Fifth, select the simplest established model that captures the material features identified.

Model Selection Framework for an Unlisted Company

Use Black-Scholes when the option terms are standard and employee behaviour can be represented by a supportable expected-life assumption. Consider a Binomial lattice when the contractual life is long, exercise can occur at many points, employee exercise behaviour is material and observable, or assumptions need to vary through time. Consider another model where the award has path-dependent market conditions that neither approach captures adequately.

The company should also consider consistency across grants. Changing from Black-Scholes to Binomial is not inherently problematic, but the rationale should be clear. A change may be appropriate because the scheme changed, because longer-dated grants were introduced, or because sufficient exercise data is now available. A model should not be changed simply because the finance team prefers a different expense outcome.

For companies building a broader ESOP governance framework, this model-selection process should sit alongside the ESOP scheme design process, the Valuation of ESOPs for unlisted companies and the ESOP tax framework in India. The three workstreams are connected, but each serves a different compliance and decision-making purpose

What Documentation Should Support the Valuation?

A defensible ESOP Valuation is not only a model output. Auditors, boards and regulators may need to understand why the model was selected and how each assumption was determined. The documentation should therefore be capable of being reviewed independently without relying on explanations that exist only in email or in the analyst's spreadsheet.

The file should identify the grant date, number of options, exercise price, vesting schedule, contractual life, post-vesting exercise window and relevant leaver provisions. It should also document the underlying share value, expected volatility basis, risk-free rate source and term, dividend assumption, expected-life methodology or Binomial exercise rule, and any segregation of employees into different behaviour groups.

Practitioner's Documentation Checklist

Approved ESOP scheme, grant letter and board/shareholder approvals relevant to the grant.
Grant-date underlying equity Valuation and the basis for using that value in the option model.
Model-selection memo explaining why Black-Scholes or Binomial reflects the award's substantive terms.
Volatility peer set, observation period and calculation methodology.
Risk-free rate, dividend yield and expected-life or employee-exercise assumptions.
Model output, option fair value and reconciliation to the share-based payment accounting schedule.
Review evidence from finance, auditors and the IBBI Registered Valuer or other Valuation professional involved in the assignment, as applicable.

For Black-Scholes, expected life deserves a specific narrative because it is often the assumption that substitutes for direct modelling of employee exercise behaviour. The company should explain whether it used historical exercise data, contractual features, employee grouping or another reasonable method. For a Binomial model, the documentation burden shifts toward the lattice design: the number of steps, exercise threshold, treatment of vesting, treatment of post-vesting termination and any time-varying inputs should be described clearly.

The same principle applies to the underlying equity Valuation. If the share value comes from an independent report, the ESOP file should identify the Valuation date, methodology and security being valued. An IBBI Registered Valuer's equity report should not be used mechanically if the option relates to a different class of shares or the grant date is materially different from the Valuation date. The option model is only as reliable as the share value fed into it.

Closing Summary: Choose the Model That Fits the ESOP

Black-Scholes and the Binomial Model are both established tools for ESOP Valuation, but they solve the problem differently. Black-Scholes is efficient when a standard award can be represented through a single expected life and weighted-average assumptions. A Binomial lattice becomes more useful when exercise timing, long contractual life, employee behaviour or changing inputs are material to fair value. For simple terms, the two approaches should produce closely converging values when calibrated consistently; complexity by itself does not create a better Valuation. Indian companies should therefore begin with the ESOP scheme, identify the features that materially affect employee exercise and option value, support the underlying equity Valuation, and then select the least complex model that faithfully reflects those economics. Elite Valuation's IBBI Registered Valuer and Chartered Accountant team can support the underlying equity Valuation, option-pricing framework and documentation required for a defensible ESOP Valuation process.

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Frequently Asked Questions — ESOP Models

1Is Black-Scholes mandatory for ESOP Valuation under Ind AS 102?

No. Ind AS 102 does not prescribe Black-Scholes as the only permitted model. Where market prices for employee options are unavailable, the company estimates fair value using an option pricing model and selects a model that reflects the substantive terms and characteristics of the award. Black-Scholes-Merton is widely used for comparatively simple grants because it is transparent and efficient, but a Binomial or other flexible model may be more appropriate when expected early exercise, long contractual lives or changing inputs are important. The model choice should therefore follow the economics of the ESOP rather than a fixed preference for one formula.

2When should a company use the Binomial Model for ESOP Valuation?

A Binomial or lattice model becomes more useful when employee behaviour and option terms cannot be represented well by one weighted-average expected life. Typical indicators include a long contractual option term, the ability to exercise at different points after vesting, observable employee exercise behaviour linked to the share price, different employee groups with different exercise patterns, or a need to vary volatility, dividend assumptions or risk-free rates over time. The model can explicitly represent exercise decisions at different nodes, which makes it more flexible than a single-period closed-form model.

3Is Black-Scholes suitable for startup ESOP Valuation in India?

Yes, Black-Scholes can be suitable for a startup ESOP where the award is relatively simple and the assumptions can be represented credibly through a single expected life, expected volatility, risk-free rate and dividend yield. The difficult part for an unlisted startup is usually not the formula but the inputs, especially the underlying share value and expected volatility. A robust peer set, supportable volatility period, documented expected-life assumption and consistent risk-free rate are therefore more important than using a complex model merely for appearance.

4Why can Black-Scholes and Binomial ESOP values differ?

The two models can produce similar values when they are calibrated to the same economic assumptions and the award is simple. Differences arise when the Binomial model captures features that Black-Scholes compresses into weighted-average assumptions. These may include early exercise at different share-price levels, contractual life rather than a single expected life, changing volatility or interest rates, blackout periods and different exercise behaviour among employee groups. A difference in output is therefore not automatically a model error; the first question is whether the models are actually representing the same assumptions and award features.

5What is the expected life input in Black-Scholes ESOP Valuation?

Expected life is the period from the grant date to the date on which the employee is expected to exercise the option. It is not automatically the same as the contractual life. Employee options are commonly exercised before expiry because they are non-transferable, employees may leave the company, or employees may prefer to realise value once the share price reaches a certain level. Under a Black-Scholes-Merton approach, this behaviour is reflected through an expected-life assumption. In a Binomial model, similar behaviour can instead be modelled directly across the contractual term.

6Does a Binomial Model always give a more accurate ESOP value?

No. A Binomial model is more flexible, but flexibility does not automatically make the result better. A lattice with unsupported exercise thresholds, arbitrary step assumptions or weak employee-behaviour data can create false precision. For a simple ESOP with a short exercise window and stable assumptions, Black-Scholes may produce substantially the same value with fewer assumptions and easier audit review. The better model is the one that captures material features of the award with assumptions that the company can support and document.

7Who should support the ESOP Valuation model and assumptions?

The company should maintain management-approved award terms and provide reliable information on grants, vesting, exercise windows, leaver provisions and historical employee behaviour. The underlying share Valuation and option-pricing exercise should be supported by appropriately qualified professionals based on the purpose and applicable framework. An IBBI Registered Valuer can support the underlying equity Valuation and broader ESOP Valuation workstream where the assignment falls within the registered Valuation framework, while the finance team and auditors evaluate the Ind AS 102 accounting assumptions and recognition.

8Can the same ESOP Valuation model be used every year?

A company may continue using the same model if the award design, exercise behaviour and available information remain consistent, but the model choice should not become automatic. New schemes may introduce longer exercise periods, graded vesting, different leaver rules or market-based vesting conditions. Graded vesting under Ind AS 102 may require tranche-by-tranche Valuation even where Black-Scholes remains appropriate, while relative TSR or other path-dependent conditions may point toward Monte Carlo ESOP Valuation. Employee exercise data may also become available as the ESOP matures. Each new grant-date Valuation should therefore confirm that the selected model still reflects the award's substantive characteristics and that the underlying assumptions remain supportable.