Anamudi Technologies grants one lakh employee options at the money, with a four-year expected term, 35% volatility and a 7% rate. What is the grant worth, how much does dilution change it, and why not use the ten-year contract life?

Each option is worth about Rs 114 on a four-year term, Rs 114 after dilution, so the grant costs about Rs 1.14 crore. The ten-year life would say Rs 185, so the choice of term moves the value by Rs 71 while dilution moves it by a few paise. Employees cannot sell or hedge the option, so they exercise early or leave, and four years is the life the option actually has.

Set it up as a plain call. Spot and strike are both Rs 300, so the option is at the money; the rate is 7%, volatility 35% and the term four years. The model gives d1 of 0.75, d2 of 0.05, and a value of about Rs 114 per option. Say the pieces aloud: Rs 300 times N(d1) of 0.773 is Rs 232, less Rs 300 discounted four years at 7%, Rs 227, times N(d2) of 0.520, Rs 118. The option is worth about 38% of the share price, which is the usual order of magnitude for a four-year at-the-money call at this volatility.

When an employee exercises, Anamudi issues a new share rather than buying one in the market, so every holder owns a slightly smaller slice. Think of a cake cut for ten guests when an eleventh arrives: every slice shrinks, but if the eleventh guest is one lakh options against ten crore shares, the shrink is invisible. The dilution factor is N over N plus M, 10 crore over 10 crore plus one lakh, which is 0.99900, so the adjusted value is Rs 114.01 against Rs 114.12. The grant costs 1,00,000 times Rs 114.01, about Rs 1.14 crore. Dilution would matter for a company whose option pool is 10% of its shares; here it is 0.1%.

A traded option is held by someone who can sell it or hedge it, so holding to the end is free. An employee can do neither. Her wealth and her salary already sit in the company, so once the option is comfortably in the money she exercises and diversifies, and if she leaves before vesting the option lapses. The expected term is the average life the options actually have once early exercise and forfeiture are allowed for, and it is estimated from the company's own exercise history, not chosen. The accounting standards for share-based payment, Ind AS 102 and IFRS 2, require the expected term for exactly this reason; confirm the current wording before quoting it in a board paper.

Close with what the board should hear. The cost is about Rs 1.14 crore spread over the vesting period, and the two assumptions worth challenging are the term and the volatility, because each moves the number by tens of rupees per option; the dilution adjustment is a formality at this scale. If the company also expects, say, 10% of the grants to lapse unvested, the expense falls to about Rs 1.03 crore, but that forfeiture estimate is trued up as people actually leave. State the limitation: the model treats the four-year option as if it were a traded European call, which overstates value for an employee who exercises in a pattern rather than at one date, and the lattice models that handle that pattern are the natural next step.