Strike Price
Definition
The fixed price at which you can buy shares when you exercise your stock options. The strike price is set at the Fair Market Value (FMV) on the date your options are granted. A lower strike price means greater potential profit when you exercise (since profit = current FMV minus strike price).
Real-World Example
You join a startup when the 409A valuation sets FMV at $0.50/share. Your strike price is $0.50. Two years later, the company raises a round at $20/share. If you exercise, you pay $0.50/share for stock that may be worth $20 — a $19.50/share paper profit.
Common Mistake
Thinking a low strike price automatically means you will make money. The strike price only matters if the company share price increases above it. If the company fails or the share price stays flat, your options could be worthless regardless of how low the strike was.
Why It Matters
Strike price determines your break-even point and potential upside. Joining a startup earlier (when FMV is lower) means a lower strike price and more potential profit — but also more risk.
Related Terms
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