Stock Option
The right to purchase company shares at a fixed strike price, typically granted to employees as compensation and earned through vesting.
A stock option grants the right, not the obligation, to buy a set number of company shares at a predetermined strike price (usually set at the current 409A fair market value at grant), typically becoming exercisable as the underlying grant vests over time. The value to the holder comes from the spread between the strike price and the share's actual value at the time of exercise or sale.
Options only have value if the company's share price rises above the strike price — if the company's value falls below the strike price ('underwater' options), the options are effectively worthless unless the strike price is repriced, which is a common issue after a down round.
Option value at exercise = (fair market value per share - strike price) x number of shares exercisedAn employee is granted 10,000 options with a $2.00 strike price. When the company is later acquired at $9.00 per share, the employee's options are worth (9.00 - 2.00) x 10,000 = $70,000 before tax, minus the cost to exercise.
Give new employees a plain-English explanation of strike price, exercise windows, and tax treatment at grant — most people joining an early-stage startup significantly overestimate or underestimate what their options are actually worth without this context, which affects both retention and trust.
What does it mean for stock options to be underwater?
It means the current fair market value of the stock has fallen below the option's strike price, making the option worthless to exercise unless the company repriced the strike or the value later recovers.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.