Do the Math on the Stock Option Cost to Purchase Equity

David Cummings on Startups

One of the common tenets of the startup community is the importance of equity to align interests and share in the value created. There are a number of different ways to provide equity with stock options, restricted stock units, and profit interests. Stock options are still popular but one aspect of them that isn’t well understood is the concept of the strike price and how that plays into exercising the options to buy the equity.

The strike price corresponds with the value of the company at the time the equity was issued. So, if the company is worth $1 million, and there are 1 million shares of stock, each share of stock is worth $1. Thus, joining a startup with these characteristics and receiving stock options for 1% of the business would represent 10,000 shares at a strike price of $1 per share. Once the options are vested, to get…

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