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.
strike price
/straɪk praɪs/ noun — Also called exercise price. The fixed per-share price at which the holder of a stock option may purchase shares. Set at the fair market value of common stock on the date the option is granted, as determined by a 409A valuation for private companies. The lower the strike price relative to the eventual sale price, the greater the financial gain per share upon exercise.
Why it matters
The strike price determines how much you pay to exercise your options and therefore how much upside you capture. A lower strike price means a larger spread between what you pay and what the shares are eventually worth — that spread is your profit.
It also must be set correctly — at or above fair market value — or the IRS can impose severe penalties under Section 409A: immediate income recognition on all unvested options plus a 20% excise tax. This is why startups do formal 409A appraisals rather than informally setting the price.
This is the core reason why joining a startup early, when the strike price is low, can be so financially rewarding. Early employees take more risk, and the low strike price is part of their compensation for that risk.
How it works
Your strike price is set when options are granted, based on the company's fair market value of common stock 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 (before taxes).
Early employees benefit from lower strike prices because the company was worth less when they joined. This is often called the "early employee premium." 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 and the same number of shares.
The gap between the strike price and the current fair market value is called the "spread" or "intrinsic value." For NSO holders, this spread is taxed as ordinary income when they exercise, regardless of how long they hold the shares afterward. For ISO holders who meet the qualifying holding periods, the eventual gain may qualify for long-term capital gains rates.
Early vs. late employee example
| Employee | Strike price | Exit price | Gain per share |
|---|---|---|---|
| Employee #3 (seed) | $0.05 | $20.00 | $19.95 |
| Employee #20 (Series A) | $0.80 | $20.00 | $19.20 |
| Employee #75 (Series B) | $3.50 | $20.00 | $16.50 |
History and origin
The concept of a fixed exercise price for employee stock options traces back to the Revenue Act of 1950, which created the first preferential tax treatment for stock options. Early rules allowed companies to set option prices at or near market value. Over time, abuses emerged — particularly "backdating," where companies retroactively set grant dates to coincide with lower historical stock prices, effectively giving employees below-market exercise prices.
The backdating scandals of the mid-2000s, which implicated dozens of public companies including Comverse Technology and Broadcom, prompted the IRS and SEC to tighten rules significantly. The IRS codified Section 409A in the American Jobs Creation Act of 2004, imposing strict rules that strike prices must equal fair market value on the grant date, with severe penalties for violations.
For private companies, this created the need for formal 409A valuations — independent appraisals of common stock value. A cottage industry of 409A valuation firms emerged, providing affordable appraisals for startups. Today, most startups get a 409A every 12 months or after any major financing event, and the strike price for new grants is set based on that appraisal.
Frequently asked questions
What is a strike price in startup equity?
The strike price (also called exercise price) is the fixed per-share price you pay to convert your stock options into actual shares. It is set at the time of grant, based on the company's fair market value at that moment (usually from a 409A valuation). The lower your strike price relative to the eventual exit price, the more money you make per share.
How is the strike price determined?
The strike price must be set at or above the fair market value of common stock on the grant date, as determined by a 409A valuation — a third-party appraisal. Setting the strike price below fair market value triggers IRS Section 409A penalties: immediate income tax and a 20% excise tax on all unvested options.
Why do early employees have lower strike prices?
Early employees receive options when the company is worth very little, so the fair market value of common stock — and therefore the strike price — is very low, sometimes fractions of a cent per share. As the company grows and raises at higher valuations, later employees receive options with higher strike prices. This is the financial reward for taking on early-stage risk.
What is the spread and why does it matter for taxes?
The spread is the difference between your strike price and the fair market value of shares at exercise. For NSOs, this spread is taxed as ordinary income — a real cash tax event even if you can't sell the shares yet. For ISOs, the spread counts toward AMT calculations but is not regular income tax at exercise.
Does the strike price change over time?
No. The strike price is fixed at grant and does not change. However, new grants issued at different times will have different strike prices reflecting the company's value at those grant dates. As the company raises money at higher valuations, new grants have higher strike prices.
What happens to my strike price in a stock split?
Both the strike price and the number of options adjust proportionally so your total economic position remains unchanged. In a 2-for-1 split, your strike price is halved and your option count doubles. This is purely mechanical and does not change the value of your options.
Can I negotiate my strike price?
No — the strike price must equal the fair market value of common stock at grant as determined by a 409A valuation. This is a legal requirement. What you can sometimes negotiate is receiving a grant sooner (before the next 409A reappraisal raises the FMV) or getting more options at the current strike price.
Learn more
- 83(b) election explained: how to save on taxes when you exercise early
- Types of startup equity: common stock, options, SAFEs, and more
- Vesting explained: cliffs, acceleration, and the schedule that protects everyone
Related terms
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