Strike price and fair market value are two different numbers that happen to start out equal (or very close to it) and then diverge over time, and mixing them up is one of the most common sources of confusion for people new to equity compensation. This post covers what each one actually measures, how they relate to each other, and why the gap between them is the whole point of holding options.
What is a strike price?
Your strike price is the fixed price per share you’re entitled to pay when you exercise your options, set at the time your options were granted and locked in for the life of that specific grant. It’s sometimes called the exercise price, and it doesn’t change based on later company performance, funding rounds, or new valuations, no matter how much time passes between your grant date and when you actually exercise.
What is fair market value?
Fair market value (FMV) is the current estimated worth of a single share of the company’s common stock, determined at private companies through a 409A valuation and updated at least every 12 months or after a material event like a new funding round. Unlike your strike price, FMV moves over time, generally reflecting how the company’s overall value has changed since your options were granted.
How are they related?
At the moment your options are granted, your strike price is typically set equal to the FMV at that time, which is a requirement, not a coincidence. Companies are required to price option grants at or above fair market value to avoid tax penalties, so the two numbers start out matched. From that point forward, your strike price stays frozen while FMV moves independently, and the gap between them (called the spread) is what determines whether your options are actually worth exercising.
Why does the gap between them matter so much?
The spread between your strike price and current FMV is essentially the built-in value of your options. If FMV is above your strike price, exercising means buying shares for less than they’re currently considered worth, which is the entire appeal of holding options. If FMV falls below your strike price, the options are “underwater,” meaning there’s no financial reason to exercise, since you’d be paying more than the shares are currently valued at.
Does my strike price ever change?
No, not for options you already hold. Your strike price is fixed at grant and stays that way regardless of how many new 409A valuations come afterward. The only way your effective price changes is if your company undertakes a formal repricing, typically in response to a down round, which requires a specific company action rather than happening automatically.
Worked example
Say you’re granted 5,000 options with a strike price of $3, matching the 409A valuation at the time of your grant. Two years later, after a new funding round, the current FMV has risen to $11 a share.
Your strike price is still $3, unchanged. The spread is now $8 a share, or $40,000 total across your grant, which is the taxable amount if you exercise (subject to ISO or NSO rules) and the rough measure of your options’ current built-in value. If instead the company had gone through a down round and FMV fell to $2, your options would be underwater, with no financial reason to exercise at a $3 strike price for shares currently valued below that.
FAQ
Is my strike price the same as what I’ll pay in taxes? No. Your strike price is what you pay to buy the shares. Tax is based on the spread between your strike price and FMV (for options) or on other separate calculations, not on the strike price itself.
Can my strike price go up after I’m granted options? No. It’s fixed at your grant date and doesn’t increase later, regardless of how the company’s valuation changes.
What does it mean if my options are underwater? It means the current fair market value is below your strike price, so exercising would mean paying more than the shares are currently considered worth.
Where do I find my strike price and the current FMV? Your strike price is on your original grant agreement. The current FMV comes from your company’s most recent 409A valuation, which your equity plan administrator or HR team can typically provide.
Does a new funding round automatically change my strike price? No. A new round can trigger a new 409A valuation, which sets the strike price for new grants going forward, but it doesn’t retroactively change the strike price on options you already hold.
What to do next
Your specific strike price and your company’s current FMV determine your actual spread, not general industry patterns. You can model your own numbers at movewealth.io.
MoveWealth is not a broker-dealer, investment adviser, or lender. This is educational content, not financial, tax, or legal advice. Consult a qualified professional about your specific situation.