4 ms·

You can't use Black-Scholes on private company options.

• lordnacho 10y ago
  But you can use some of the considerations that BS theory talks about. People don't use BS theory for any other options either.
  • dx034 10y ago
    Yes they do. There's enough option pricing that is at least partly based on BS.
    • lordnacho 10y ago
      Yes, partly based on, using the lessons from, slight modifications of, and so on. But I've never seen anyone try to claim that the BS formula was enough to give you the right price. And I've traded on more than one derivs desk.
      • sedachv 10y ago
        According to what I remember reading in https://mitpress.mit.edu/books/engine-not-camera https://mitpress.mit.edu/books/engine-not-camera before the Black-Scholes formula started being applied by traders, the market prices did not correspond to the prices predicted by the model, because there was no other mathematical model to price options, most of the trading was done based on heuristics, and the market was highly inefficient. For at least the first few years when the Black-Scholes formula first started being used by traders the market converged on the predicted prices. As speculation and arbitrage opportunities were identified, the prices of options diverged from the result of the Black-Scholes formula, and other models were developed, based on the Black-Scholes equation.
• ska 10y ago
  As far as I can see you can't use anything very effectively for early stage private companies, the information is low and the variance is high. Even with perfect transparency for very early employees, predictions are pretty worthless. The only realistic thing you can do is make sure the shareholders agreement doesn't have any tricks in it and have a feel for the domain you are working in.