Weekend Musing: The Black (Scholes) Box of Stock Based Comp - And Why It Matters

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Weekend Musing: The Black (Scholes) Box of Stock Based Comp - And Why It Matters

Biotechnology

EQUITY RESEARCH Industry Report

June 26, 2026

Weekend Musing: The Black (Scholes) Box of Stock

Research Analysts:

Josh Schimmer Based Comp - And Why It Matters

310-282-6513

Josh.Schimmer@cantor.com Summary: Companies typically use the Black-Scholes model for valuing Eric Schmidt

212-294-7724 employee option grants as part of Stock Based Compensation (SBC).

Eric.Schmidt@cantor.com

Prakhar Agrawal ●However, as we discuss in this report, Black-Scholes is based on

212-610-3614 historic stock volatility - which may not be reflective of the future stock

Prakhar.Agrawal@cantor.com performance, especially for biotech companies, which are punctuated

Olivia Brayer Saunders

212-428-5907 by binary events and often outsized performance.

Olivia.Brayer@cantor.com

Carter Gould ●Another confounding factor is that there is poor correlation

212-915-1794 between stock volatility and stock performance.

Carter.Gould@cantor.com

Kristen Kluska ●To illustrate, many smaller biotech companies grant employees 212-915-1927

Kristen.Kluska@cantor.com stock options with 6 year terms and assume ~100% volatility. As

Imogen Mansfield described below, this implies a potential +250% return over 6

929-545-6495 years. And as we all know, many biotech stocks will appreciate

Imogen.Mansfield@cantor.com much more over that time interval.

Steve Seedhouse

212-915-1240

Steve.Seedhouse@cantor.com ●As such, reported SBC expenses may not capture the true value of

Yanni Souroutzidis these options to the employees (or investors). This is true in both

929-730-2656 directions - the reported SBC expenses may underestimate their true