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Determining the exercise price of a stock option

Written By

Jitesh Agarwal

Published on

March 1,
2021

Last updated on

July 22, 2025
11:59

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AI Summary

Exercise price, or strike price, is the price at which an employee can purchase vested stock options during the term period.
Only vested ESOPs can be exercised, and the employee must contact the CHRO or finance team to initiate the exercise process.
The employee must pay tax at the time of exercising ESOPs, and receives the shares only after this payment is made.
The company decides the exercise price when issuing the ESOP grant letter, and it can be set at a nominal value or based on the company's last funding round valuation.
When the exercise price is tied to valuation, the employee's eventual gain depends on the difference between the valuation at grant and the valuation at the liquidity event.
A nominal exercise price, set at or near the face value of shares, is recommended because it requires a smaller upfront payment from employees.
A nominal exercise price also protects employees from losses if the startup's valuation falls after the ESOP grant.
In the example given, an employee granted 100 ESOPs at ₹70 per share based on a ₹80 valuation would lose ₹5 per share if the FMV drops to ₹65 after three years.
If the same ESOPs were instead granted at a nominal exercise price of ₹10 per share, the employee would still profit despite the fall in valuation.

Content Overview

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Exercise price or strike price is the price at which the holder of stock options has the right, but not the obligation, to purchase vested options within the term period.

ESOPs that have vested can be exercised. To do this, the employee has to reach out to the CHRO or the finance team, and initiate the process of exercising ESOPs. Note that the employee has to pay a tax while exercising ESOPs, and only after that he/she will receive the shares and then may choose to sell.

The strike price of options can be anything that is chosen by the company while giving out the ESOP grant letter. Some startups choose the exercise price as a nominal amount (say INR 10) while some startups choose the exercise price based upon the last round valuation of the company.

In the latter case, the difference in the company’s valuations between when the employee joined and the liquidity event in which he/she sells ESOPs, represents the money gained by the employee.

While there is no concrete formula to arrive at the ideal exercise price, we suggest founders set the exercise price at a nominal value (face value of shares at minimum). There are two advantages of a nominal exercise price:

Employee-friendly: Employees won’t have to pay a larger value for exercising their ESOPs
Independent of Valuation: If the valuation of the startup goes down significantly, employees might end up losing money from the ESOPs they would have exercised

Let’s say the exercise price of ESOPs as per the last round valuation of the company is INR 80, and the employee was offered 100 ESOPs at an exercise price of INR 70. The company went on to raise another round of funding 3 years after ESOPs were granted to this particular employee. Assuming that the valuation of the company has gone down and the FMV of shares is INR 65 now, the employee will make a loss of INR 5 per share if he/she exercises and sells the shares on the present day.

Now if the employee was granted ESOPs at a nominal exercise price of INR 10 each, the employee will make some money despite the decreased valuation.

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About the Author

Jitesh Agarwal

Founder | jitesh@treelife.in

Leads the VCFO, finance tax, and regulatory functions at Treelife. Responsible for the firm’s non-operational growth and providing strategic advisory in GIFT City, helping clients navigate complex regulatory landscapes effectively.

Reviewed By

Jitesh Agarwal

Founder

Leads VCFO, finance, tax, and regulatory functions at Treelife. Advises on GIFT City structuring and strategic financial decisions for startups and scale-ups.