Exercise Price / Strike Price

The exercise price (also called the strike price) is the price you pay to turn your stock options into actual shares. It's set at the time the options are granted and it stays fixed, regardless of how much the company's value changes afterward. If your exercise price is $0.50/share and the company eventually goes public at $20/share, you still pay $0.50 for each share you exercise — that spread is your profit.

The exercise price must be set at or above the fair market value (FMV) of the company's common stock on the grant date, as determined by a 409A valuation. This is an IRS requirement, not a suggestion. Granting options below FMV ("cheap stock") triggers Section 409A penalties for the recipient and can create serious problems during IPO audits or due diligence.

For early-stage employees, the exercise price is typically very low because the common stock FMV is a fraction of the preferred stock price. An employee who joins at the seed stage might have a $0.10 exercise price; someone who joins at Series B might have a $2.00 exercise price. The earlier you join, the lower your strike price — which is one of the financial incentives for joining early-stage startups despite the lower cash compensation.

The exercise price directly determines the economics of your equity compensation. A low exercise price means you pay less to acquire shares, and your potential upside is larger. It also affects exercise decisions: if the current FMV is close to your exercise price, exercising is cheap. If the gap between exercise price and FMV is huge, exercising might cost real money and trigger tax events. Understanding your exercise price helps you plan when and whether to exercise — and how much cash you need to do it.