Stock options give the holder the right to purchase a certain number of shares in a company at a predetermined price, known as the strike price. Used interchangeably in conversations with exercise price, it is a crucial component of any option grant as it greatly determines the potential profitability.
Whether exercising the options immediately upon vesting or waiting several years, the strike price remains fixed.
Even if the company goes from being a ten-person team to a billion-dollar behemoth that employs hundreds of people, the strike price at grant remains the same.
How is the strike price determined?
As such, the strike price is either set at a nominal value or at face value, which is the initial value of the company’s stock during incorporation.
When creating their employee stock option plans, companies aim to set the strike price as low as possible to maximize the potential payout for the option holder. This ensures that the holder can potentially realize significant gains on exercising their options.
What’s a good strike price?
There are no publicly available benchmarks for this. However, based on our experience, Indian companies tend to offer a nominal strike price of ₹10. This is done to ensure that in the event of stock split (anyone with one stock will then have two or more), the price doesn’t go below the minimum mandated ₹1 mark.
Some companies also set the strike price equal to or at a certain discount to the current market value of the shares. This is a red flag.
Where do I see the strike price of my stock options?
In your grant letter.
Many companies now use software and online platforms like Infinyte Owners to communicate their stock options. In that case, you need to simply login with your credentials to see the strike price of your granted options.
Can the strike price be renegotiated?
Unlikely. The strike price is determined when the ESOP policy is first established, and any changes require approval from the board.
How does it affect the tax I pay?
The strike price of your options is essentially what you pay your company to buy the shares. The difference between the strike price and the current price is what will determine how much tax you pay (Perquisite Tax) at the time of exercise.
For instance, if the strike price of your options is ₹10,00,000 and the current market price is ₹12,00,000, the perquisite, or the taxable amount, would be the difference between the two, which in this case is ₹2,00,000. And you’ll therefore be taxed on ₹2,00,000.