What is the Strike Price of an Employee Stock Option? (Exercise Price)

TL;DR

The strike price or exercise price is how much an employee will pay to exercise one share of your company's stock.

The strike price or exercise price is how much an employee will pay to exercise one share of your company's stock. The strike price is determined by the Fair Market Value (FMV) at the time the options are granted.

Why do I need to know my strike price?

Your strike price is an important piece of information about your employee stock options for 2 primary reasons: 1) exercise and taxes & 2) the value of your options.

Exercise and taxes

First of all, your exercise price is used to compute the dollar amount required to exercise, as well as the tax implications of your options. To exercise, you must pay the strike price times the number of vested options you wish to exercise in exchange for your shares.

If you exercise 100 shares with a strike price of $1, you will pay $100.

Taxes are then calculated based on the spread between the current Fair Market Value (FMV) of the stock and your strike price. Taxes are calculated differently depending on which type of Employee Stock Options you have been granted.

Value of your options

Next, your strike price sets the floor where you are in the money. Basically, if the current price of the stock is greater than your strike price, your options have positive value. If the current price is less than your strike price, your options are considered under-water.

Stock Options are tough to value given their illiquid and uncertain nature, however we at ESO attempted to place value on these options here.

Example:

You have 100,000 vested options at Company X with a strike price of $1.

The current FMV of Company X stock is $3.

In order to exercise, you will need to pay $100,000 (100,000 shares x $1 per share).

Your taxable gain at exercise will be $200,000 (100,000 shares x $2 or $3 - $1). **Remember this gain will be taxed differently depending on what type of options you were granted.

In the future, if Company X goes through an IPO or M&A event, you will be able to sell your shares hopefully for an even higher price.

Where can I find my strike price?

Your strike price will be located in your stock option grant. This may be a physical piece of paper or a pdf sent by the company, but in 2022 more often than not it is located in an equity portal like Carta or Shareworks.

If you cannot locate your stock option plan or equity portal, you should reach out to whoever is in charge of stock options at your company (ex: Controller, HR, VP Finance etc).

You should also know your strike price prior to accepting your job offer. This will help you assess your option package and decide whether or not to negotiate your stock option grant.

Can my strike price be changed after my shares are granted?

It depends on the situation. There is no case where your strike price will be changed to a larger value (outside of an error at the company). In some cases when the Fair Market Value drops below your strike price (aka underwater), the company will offer to "re-price" the stock options to the new, lower value. If your options are ever underwater, it can be worth asking the company to extend this courtesy and re-price your options, though they are not obliged to do so.

If you have any questions about your strike price or option exercise, please submit our form below to talk with one of our Equity Partners.

This innovative service promotes and enables a healthier relationship between companies and employees. I my opinion it's valuable to employees and great for the overall tech environment and economy. It is good for nobody when employees feel trapped because they can't afford to leave. In less extreme cases exercising can be expensive and somewhat risky and this is simply a good smart hedge and a good square deal. Brilliant!

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