Deal Terms
Exercise Price
The price per share at which an option holder can purchase shares — same as strike price, set at fair market value on the grant date.
Exercise price (or strike price) is the predetermined price at which a stock option holder can purchase company shares. Under IRS regulations, options must be granted at or above fair market value (FMV) at the time of grant — hence the need for 409A valuations to establish FMV. If you receive 10,000 options with an exercise price of $1.00/share, you can purchase those shares for $10,000 total regardless of what the shares are worth when you exercise. Options are 'in the money' when current FMV exceeds exercise price (profitable to exercise), and 'underwater' when FMV is below exercise price (no rational economic reason to exercise). Exercise prices are set once at grant — they don't change unless the company reprices options (a controversial practice).