What is the Option Pricing Model (OPM)?
Carta Valuations utilizes the Black-Scholes Option Pricing Model (OPM). The OPM models each discrete exit scenario from $0.00 to infinity, and calculates the value for each share class in each scenario.
One notable benefit to using the OPM is that it accounts for the economic rights often seen in private companies with complex capital structures, including preferred liquidation preferences, payout seniority, and option strike prices.
The OPM uses five primary inputs:
The expected time to exit,
the risk free rate as of the Valuation Date associated with the expected time to exit,
the volatility derived from similar publicly traded companies,
the value of the underlying asset (i.e. the Company), and
the price at which the option holder has the right to purchase the underlying asset.
The equation for the Black-Scholes OPM is shown to the left.