The price per share you pay when exercising stock options. Set at fair market value when options are granted, typically based on a 409A valuation. If the company's value grows, you profit from the difference.
Why it matters
The strike price determines how much you pay to exercise your options. A lower strike price means more upside. It also must be set correctly (at or above FMV) or the IRS can impose penalties. This is why joining a startup early, when the strike price is low, can be so financially rewarding.
How it works
Your strike price is set when options are granted, based on the company's fair market value at that time, typically from the most recent 409A valuation. If the 409A says common stock is worth $0.50/share and the company is later acquired for $10/share, your profit is $9.50 per share. Early employees benefit from lower strike prices because the company was worth less when they joined. This is the "early employee premium." For example, employee #5 with a $0.10 strike price makes far more per share than employee #50 with a $2.00 strike price, even if they hold the same number of options.
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