Employee Stock Options: After the Dot-Coms

While the dot-com frenzy is over, shares in such industries as pharmaceuticals, consumer goods, home building, banking and finance, and certain electronic sectors continue to trade at relatively high levels. Thus, claims for damages stemming from lost stock options remain common in employment suits brought by employees who have been terminated by companies in these industries.

An employee stock option grants the employee the right, but not the obligation, to purchase common stock of the employer corporation during a specified period of time, for an agreed-upon price. Typically, the duration of an employee stock option is 10 years from the date of grant. As late as the mid-1990s, valuation of damages in claims involving employee stock options was a matter of projecting the price of the underlying stock, then making assumptions as to when the plaintiff would have exercised the options over the remainder of their term. This methodology gave way to the Black-Scholes Option-Pricing Model, as plaintiff economists gradually increased their sophistication. This model of valuation was developed by Fischer Black and Myron Scholes in the early 1970s. While the model enjoys an excellent pedigree ' Myron Scholes was awarded the Nobel Memorial Prize in Economic Sciences for his work on the theory of option valuation ' it is often misapplied in the employment-litigation setting.