The ‘strike price’ can be defined as the price you pay to buy shares when you exercise a stock option. The strike price options are set by the 409A Valuation issued to employees, contractors, advisors and someone else who gets the common stock. In other words, strike price is a fixed price to purchase a set number of company shares.
The strike price known also as the set future price per share to exercise a stock option will not be lower than the current real value of a share of the company’s stock on the day the stock option is issued.
How to Determine the Strike Price of a Company?
The amount of strike price will depend on how mature your company is and how well its performance is. In most companies, the strike prices will be under a dollar, even as load as five cents or ten cents. As the company grows, the strike price will grow as well.
The stock option strike price also depends on the number of company’s shares that exist. If there are two startups that run their business in the same path, but the first startup has created 10,000 shares up-to-date. Since each share represents a larger chunk of the company, the 409A valuation of the first startup’s shares will be ten times as high as the second startup.
It’s very straightforward for most companies to determine the strike price. What they should do is to look at what the stock is trading at currently. Well, that is the price which people are willing to pay on the open market. For example, if Facebook is trading $180 per share, their Fair Market Value is $180 that day.
Assuming your stock option strike price is $5 per share. To get a $5 price, the company will have to determine its fair market value (FMV). Of course, FMV is very important for the private companies, as it will show you what the price would be if the stock were traded publicly on the open market.
In this case, your stock option strike price will be commonly equal to the Fair Market Value (FMV) of the company’s stock on the day that the stock option is granted.
How Is the Strike Price of Stock Option Calculated?
The strike price is actually set to the company’s 409A valuation at that time when you get stock options. Of course, the company will update their 409A valuation regularly, at least every 12 months.
A company will then obtain an independent appraisal of the value of their shares for tax purposes. That’s the 409A valuation and that figure will become the strike price of any newly granted stock options.
Assuming your company’s shares get valued at $2 per share. Then, every new employee that receives an option grand will have a strike price of $1 per share. Of course, it will be the strike price for all new stock options until a company obtains a new appraisal and the 409A changes. It is known that the existing stock options keep their old strike price.
In fact, most companies will also obtain an updated 409A Valuation as they raise a new round of funding. The major events, like the pandemic of Covid-19 actually lead the companies to reevaluate their 409A valuation.
Typically, anytime there is big news for a company, they will take an option to reevaluate their 409A valuation and their strike price is no exception to go forward.
Where to Find the Company’s Strike Price?
The strike price gets set as your company receives your initial stock option grant. With the grant, your company will provide you the strike price, the number of options and their vesting schedule. You definitely will pay your company the same exact amount per share, not including taxes.
It does not matter if you exercise right away, the strike price will always be how much you will pay to exercise each option. Even if your company’s value goes through the roof, the strike price actually remains the same amount which was in your option grant.
Commonly, you will find your company’s current 409A value in the same online equity management platform in which your strike price is. However, if you cannot find the 409A, you can ask someone in the finance or HR department for help.
So far, your company’s strike price will be indicated on your initial stock option grant. It may also come in the form of paperwork. But these days, most companies will manage their equity on a digital platform like Carta or Shareworks. To use it, you just simply log in and find out the details about your options including the strike price.
What Is the Difference Between Strike Price Vs Exercise Cost Vs Exercise Price?
You should know that there is no difference between the strike price and exercise price. On the other hand, the exercise cost is the strike price and any taxes that you need to pay as you exercise your options. It may stink, but you will need to pay taxes when you exercise.
If the 409A goes up enough, you may owe tax on the difference between your strike price and the current 409A valuation. In this case, the higher that valuation gets from your strike price, the more your exercise costs will be. If you really want to know what it would cost to exercise your stock options including strike price and taxes.
Why Is the 409A Value Important for Start-Up Employees?
The 409A valuation actually impacts employees in two ways:
- The 409A value determines your strike price. In this case, the companies always set the strike price for new options grants equal to the current 409A. The companies cannot issue options with a lower strike price.
- The 409A value impacts your tax bill. You will be taxed on the difference between their strike price and the current 409A, when exercising your options.
Assuming you are granted options with a strike price of $1 when the 409A is also $1. If you exercise immediately, you will have to pay taxes, because the difference between 409A valuation and your strike price is $0. Otherwise, if you exercise after the 409A is set to $3 at some point in the future, you may pay tax on the $2 difference for every share you exercise.
