What is the strike price of an employee stock option?
5 min
John’s a Director at Secfi, helping founders, executives and employees navigate equity compensation and access to liquidity through his expertise in finance.
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John’s a Director at Secfi, helping founders, executives and employees navigate equity compensation and access to liquidity through his expertise in finance.
The strike price is how much you’ll pay to purchase one share of your company when you exercise a stock option.
This amount gets set when you receive your initial stock option grant. Your stock option grant will specify the number of options, their vesting schedule, and the strike price.
Each time you exercise your stock options, you will pay your company the same amount per share (excluding taxes). That's the strike price.
It doesn't matter if you exercise right away, one year later, or ten years later—the strike price will always be how much you’re going to pay to exercise each option.
Even if the company’s value goes through the roof, the strike price will remain the same amount that was in your option grant.
When you get stock options, their strike price is set to the company’s 409A valuation (also known as fair market value) at that time.
Companies update their 409A valuation regularly.
At least once a year, a company obtains an independent appraisal of the value of their shares for tax purposes. That’s the 409A valuation, and that number becomes the strike price of any newly granted stock options.
So if a company’s shares get valued at $1 a share, then every new employee receiving an option grant (as well as existing employees that get additional option grants) will have a strike price of $1 a share.
That will be the strike price for all new stock options until the company is reappraised l and the 409A changes. (Already existing stock options keep their old strike price).
Most companies also get an updated 409A valuation when they raise a new round of funding.
Major events, like the pandemic, can also lead companies to reevaluate their 409A valuation. Basically, any time there's big news for a company, they’ll likely reevaluate their 409A valuation and thus their strike price going forward.
The strike price amount really depends on a company’s stage and performance.Early on in most companies, you'll see strike prices for under a dollar—even as low as five cents or ten cents.
But as the company grows, so will the strike price.
We’ve seen strike prices anywhere from a few cents per share all the way up to hundreds of dollars per share.
It also depends on the number of company shares the company issued. If two startups are identical, but the first startup issued 10,000 shares up to date while the other issued 100,000 shares, then the 409A valuation of the first startup’s shares will be ten times as high (because each share represents a larger chunk of the company).
As a result, the strike price of stock options will also be ten times as high for that startup. So comparing strike prices between different companies is really comparing apples to oranges.
Your strike price will be indicated on your initial stock option grant.
That might come in the form of paperwork but these days, most companies manage their equity on a digital platform like Shareworks or Carta.
If that’s the case, you can just log in and find out all of the details about your options—including the strike price.
A strike price usually isn't negotiable.
That’s because it’s a fixed number based on the independent appraisal of a company share at that time.
It is technically possible to grant options at a strike price different from the 409A. But it's not very common and comes with disadvantages.
For example, if a company gave you a strike price lower than the 409A, you would immediately owe taxes on the difference.
And if your strike price was higher than the current 409A, you’d be paying more than necessary when you exercise.
Usually, you can find your company’s current 409A value in the same online equity management platform where your strike price is.
If you can’t find the 409A, you can always ask somebody in the finance or HR department (or whoever handles equity) for help.
The 409A is a number you have the right to know. So don’t be afraid to ask for it if you can't find it.
The terms 'strike price' and 'exercise price' mean the same thing.
The exercise cost, on the other hand, is the strike price plus any taxes that you have to pay when you exercise your options (because yes, it stinks, but you’ll probably have to pay taxes when you exercise).
If the 409A goes up enough, you’ll owe tax on the difference between your strike price and the current 409A valuation.
The higher that valuation gets from your strike price, the more your exercise costs will be.
If you want to know what it would actually cost to exercise your stock options, including strike price and taxes, ask Maeve, Secfi’s AI equity assistant. Maeve can estimate your exercise costs and taxes, model AMT and other scenarios, and help you weigh whether to exercise now or later.