Strike Price
The fixed price per share at which an option holder may buy. In a private company it is set near the independent valuation of the common stock at the date of the grant, which is why an option granted early is cheaper to exercise than one granted after a funding round has lifted the valuation.
Equity as an employee · 2 of 10Next: Vesting and Cliff
Why Strike Price matters in interviews
The strike price is the one number in an option grant that is fixed at the outset, and it decides both what exercising costs and how much of any later gain the holder keeps. It is also the number most easily misread, because a low strike on a tiny percentage looks generous and is not.
How it works in practice
In a private company the strike is set near the independent valuation of the common stock at the date of the grant, not the price investors paid for preferred shares. Common stock is valued lower because it ranks behind the investors’ preferences, which is why an early employee’s strike can be a small fraction of the latest round’s price.
The holder’s gain at a sale is the sale price per share less the strike, multiplied by the vested options. Exercise cost is the strike multiplied by the number of options bought.
Strikes rise with the company. An option granted after a large round carries a higher strike than one granted before it, so equity offered late buys less of the upside than the same percentage offered early.
What candidates get wrong
- Comparing the strike with the latest round price and concluding the option is in the money. The round price is for preferred shares with rights the common does not have.
- Forgetting that exercise needs cash. A holder with 10,000 vested options at a $1.00 strike must find $10,000, plus any tax, to convert them.
Strike Price: frequently asked questions
What is a strike price?
The fixed price per share at which an option holder may buy. It is set when the option is granted, usually near the independent valuation of the common stock, and it does not change when the company’s value does.
How is the strike price decided in a private company?
By an independent valuation of the common stock, which in the United States is called a 409A valuation. It is lower than the price investors pay because common stock ranks behind their preferences.
Where Strike Price comes up
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