Tobaltopia

What does early exercise of stock options mean?

Exercising your options early means you exercise your options before the shares are liquid: pre-IPO, pre-acquisition, etc. Whether or not you exercise your options early is a complex topic, and I recommend that anyone with a significant number of options in a successful company do their own research, consult tax and financial professionals, and make a plan for if and when they will exercise options.

What is the strike price or exercise price?

The strike price, sometimes called the exercise price, is the cost to you as the owner of the stock option to purchase the stock. The stock option agreement essentially states that you can purchase the stock at this price, regardless of the current market price for the stock.

What is vesting?

Vesting is basically just a fancy term for deferring the actual ownership of the stock options over time. When companies issue stock options, they usually grant the options all at once, but the employee doesn’t take ownership right away. Instead, the options transfer to the employee over time, or sometimes when certain milestones are hit. You cannot exercise stock options that you have not yet vested.

What is the expiration date?

The expiration date is the last date before which you can exercise your options. If you do not exercise your options before this date, you lose the right to exercise them, and the options get reabsorbed by the company that issued them. Usually the expiration date is years after the stock is granted – often 7 or 10 years.

What is Fair Market Value?

The fair market value of shares of a public company is determined by the market. People can buy and sell shares at will, and this leads to a price that the market deems fair at any given time. Private companies do not have a market for their shares. Instead, they have to go through a process called a 409a valuation to determine what their shares are currently worth.