Startup Culture
Underwater Options
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Quick Answer
Stock options with an exercise price higher than the current fair market value of the underlying shares, making them worthless if exercised.
What it is
Underwater options (also called out-of-the-money options) are stock options where the exercise (strike) price exceeds the current fair market value of the company's shares. Exercising underwater options would mean paying more for the shares than they're currently worth, making them economically worthless until the company's value recovers above the strike price. This commonly occurs after down rounds, market corrections, or extended periods without valuation increases.
In Practice
After the company's Series C down round repriced shares at $5 versus the $15 at which options were granted, 80% of the employee option pool became underwater. The board approved an option exchange program, allowing employees to cancel underwater options and receive new grants at the current $5 price.
Operational context
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Why It Matters
Underwater options create a talent retention crisis. Employees whose primary equity compensation is worthless have strong incentives to leave for companies with better equity packages. Addressing underwater options is essential for maintaining team morale and retention.
VC Beast Take
Option repricing or exchange programs are the standard remedy for underwater options, but they come with trade-offs: tax complications, investor dilution concerns, and the perception that employees are being 'bailed out.' The best approach is proactive communication about the company's path back to value.
Related tools and reading
Term Family
Related concepts
Further Reading
409A Valuations Explained: Why They Matter for Your Stock Options
The 409A valuation sets the price you pay for your stock options. Here's how it works, why early employees get a better deal, and what happens to your strike price as the company grows.
The VC Secondary Market Boom: What It Means for Founders and Investors
The venture secondary market hit $152B in 2025. As liquidity timelines stretch to 10+ years, secondaries are becoming essential infrastructure for the entire VC ecosystem.
Anti-Dilution Provisions Explained: What Every Founder Needs to Know
How anti-dilution provisions work in venture capital — full ratchet vs. weighted average, how they affect founder ownership in down rounds, and what to negotiate in your term sheet.
Related Questions
Browse all questions →Frequently Asked Questions
What is Underwater Options in venture capital?
Underwater options (also called out-of-the-money options) are stock options where the exercise (strike) price exceeds the current fair market value of the company's shares.
Why is Underwater Options important for startups?
Understanding Underwater Options is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Underwater Options fall under in VC?
Underwater Options falls under the startup-culture category in venture capital. This area covers concepts related to important concepts in venture capital.
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