§ 01 — Mistake One
Reusing a stale valuation across grant dates
An ESOP valuation is an opinion of fair value as at a date. The temptation is obvious: you commissioned a valuation in April, you are granting options again in November, and the business "hasn't really changed" — so the same number goes into the second grant's accounting.
The problem is that the business usually has changed, and the auditor can see it. A funding round closed at a higher price. A major contract was signed. A key market opened or a competitor exited. Any of these moves fair value, and an option granted after the event but valued as if before it understates the expense under Ind AS 102 — which is precisely the kind of understatement audit teams are trained to find.
Auditors check the gap between valuation date and grant date as a matter of routine, and they check what happened inside that gap. There is no fixed rule that a valuation "lasts" three or six months; what matters is whether circumstances at the grant date still resemble circumstances at the valuation date. A round term sheet, a large customer win, a regulatory approval — each one resets the clock.
The discipline is simple: before every grant, ask whether anything has happened since the last valuation that a reasonable buyer would pay more (or less) because of. If yes, refresh the valuation. If no, document why not — a short memo noting that the position was considered is far stronger than silence.
§ 02 — Mistake Two
One number, two incompatible purposes
ESOPs generate at least two distinct valuation questions, and they are not the same question. For accounting under Ind AS 102, the company must expense the fair value of the option at grant date — typically an option-pricing exercise (Black-Scholes or a lattice model) sitting on top of an underlying share value. For tax, the perquisite in the employee's hands on exercise is driven by the fair market value of the share, determined under the Income Tax rules applicable to the company's situation.
Different purposes, different standards of value, different valuation bases — and often different dates. When a single number is stretched across both, one of the two uses is wrong by construction. The unravelling usually starts on the audit side: the auditor asks why the accounting fair value is a share price rather than an option value, or why a tax-purpose number with its own prescribed basis is doing accounting duty. Once one purpose is questioned, both filings are exposed, and fixing it retrospectively means restating expense or revisiting withholding — both expensive conversations.
The fix costs little at the outset: state the purpose in the engagement scope, and if two purposes exist, produce two clearly labelled conclusions from one coherent underlying analysis. A competent valuer will insist on this before starting; treat it as a red flag if yours does not ask what the number is for.
§ 03 — Mistake Three
Inputs asserted, not derived
Open any audit firm's checklist for share-based payments and the first substantive questions are about inputs: where did the volatility come from, how was expected life estimated, what supports the discount rate or the risk-free rate used?
A surprising number of valuation reports answer with assertion. Volatility of "40%, based on professional judgement". Expected life equal to the full contractual term, with no reference to vesting schedules or expected exercise behaviour. A discount for lack of marketability applied at a round number with no source. Each of these may even be a reasonable answer — but an unsupported reasonable answer and an unsupported unreasonable one look identical to a reviewer, and both get flagged.
Derived inputs, by contrast, survive contact. Volatility benchmarked against a named set of comparable listed companies over a stated period, with the screening logic shown. Expected life built from the vesting schedule and stated assumptions about exercise behaviour. Every rate traced to an observable source on the valuation date. The arithmetic of an option model takes minutes; the defensibility lives entirely in whether the inputs have a paper trail.
§ 04 — The Standard
What a defensible ESOP valuation file contains
When we assemble an ESOP valuation, the file the auditor receives is designed to close questions before they are asked:
- Purpose and basis, stated up front — which regulation or standard the number serves, and the standard of value that follows from it.
- A valuation date that matches the grant date — or a documented bridge explaining why an earlier date remains valid.
- Derived inputs with sources — volatility comparables, expected-life workings, rates traced to the valuation date.
- The model, shown — assumptions, mechanics and sensitivity, not just an output.
- A one-page value narrative — a plain-English explanation of why the number is what it is, which is what the CFO, the board and the audit partner actually read first.
Reports follow IVS and ICAI Valuation Standards, and the signing valuer — an IBBI Registered Valuer for Securities or Financial Assets — remains available to answer auditor questions after delivery. Defence is part of the engagement, not an extra.
If you have grants coming up, or an auditor query on a past valuation, the cheapest time to fix the file is before the review starts. Our ESOP valuation service is scoped, fixed-fee and built for exactly this scrutiny — or talk to a valuer about the specific question on your desk.