Deal Terms
Exercise Price
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Quick Answer
The price per share at which an option holder can purchase shares — same as strike price, set at fair market value on the grant date.
Exercise price (or strike price) is the predetermined price at which a stock option holder can purchase company shares. Under IRS regulations, options must be granted at or above fair market value (FMV) at the time of grant — hence the need for 409A valuations to establish FMV. If you receive 10,000 options with an exercise price of $1.00/share, you can purchase those shares for $10,000 total regardless of what the shares are worth when you exercise. Options are 'in the money' when current FMV exceeds exercise price (profitable to exercise), and 'underwater' when FMV is below exercise price (no rational economic reason to exercise). Exercise prices are set once at grant — they don't change unless the company reprices options (a controversial practice).
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Frequently Asked Questions
What is Exercise Price in venture capital?
Exercise price (or strike price) is the predetermined price at which a stock option holder can purchase company shares. Under IRS regulations, options must be granted at or above fair market value (FMV) at the time of grant — hence the need for 409A valuations to establish FMV.
Why is Exercise Price important for startups?
Understanding Exercise Price is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Exercise Price fall under in VC?
Exercise Price falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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