Calculating Expected Term

In our last post, we covered what expected term is and why it impacts stock comp expense. Now, let's talk about how it is actually calculated.

Carta uses the Simplified Method to calculate expected term for most companies. This method was introduced by the SEC in 2005 as a practical expedient for companies that don't have enough historical exercise data to use actual historical data.

The Simplified Method formula is:

Expected Term = (Vesting Period + Contractual Life) / 2

For example, if an option has a 4-year vesting period and a 10-year contractual life, the expected term would be (4 + 10) / 2 = 7 years.

Have questions about your expected term calculations? Feel free to ask below!