Deal Terms
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Quick Answer
The price at which an option holder can purchase company shares — set at fair market value at time of grant, as determined by a 409A valuation.
The strike price (or exercise price) is the price per share at which a stock option can be exercised. Under IRS rules, options must be granted at or above the fair market value of the underlying stock at the time of grant (hence the need for 409A valuations). Example: if a 409A values common stock at $2/share and you receive 10,000 options at a $2 strike price, you can eventually buy 10,000 shares for $20,000 total. If the company is later acquired for $20/share, your options are worth ($20 - $2) × 10,000 = $180,000. Options are worthless ('underwater') if the current share price falls below the strike price. Understanding your strike price and the current 409A value is essential for evaluating the economic value of your equity package.
In Practice
TechCorp completes a 409A valuation in January showing common stock worth $2.50 per share. All employee stock options granted that quarter have a $2.50 strike price. When employee Sarah exercises 10,000 options two years later, she pays $25,000 (10,000 × $2.50) regardless of the current share value. If the company has grown and common stock is now worth $15 per share, Sarah's options are worth $150,000, giving her a $125,000 gain. However, if she had been granted options in March when a new 409A showed $4.00 per share value, her strike price would be $4.00, reducing her potential upside.
Why It Matters
Strike price determines the ultimate value employees receive from their equity compensation. A lower strike price means greater upside potential, making timing of option grants crucial for both companies and employees. Companies must conduct regular 409A valuations to ensure strike prices reflect fair market value and avoid IRS penalties. For employees, understanding strike price helps evaluate job offers and exercise timing decisions, as the spread between strike price and current value determines the tax implications and cash required to exercise options.
VC Beast Take
Strike price is where equity compensation gets real for employees, but most don't understand the mechanics until it's too late. Smart companies time their 409A valuations strategically — completing them right after funding rounds when valuations are highest, then granting options before the next valuation bump. Employees should pay attention to when they're getting grants relative to funding cycles, as a few months' difference in grant timing can mean hundreds of thousands in outcome differences.
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The strike price (or exercise price) is the price per share at which a stock option can be exercised. Under IRS rules, options must be granted at or above the fair market value of the underlying stock at the time of grant (hence the need for 409A valuations).
Understanding Strike Price is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Strike 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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