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Does FMV change?
The FMV is determined by a 409a Valuation which is required by law to be updated every 12 months or any time a company closes a funding round. It is calculated either by the company internally or by an independent firm.
What if FMV is lower than exercise price?
If the exercise price is lower than the FMV, resulting in a “discounted” option, the option is subject to the Sec. 409A, the employee will be subject to a 20\% additional tax, over and above regular income tax, on the option’s value.
What is the difference between exercise price and fair market value?
The difference between the exercise price for a share of stock and its fair market value (FMV) is called the spread.
Do exercise prices change?
The strike price doesn’t change at all over time because it’s a fixed price. Right now, those prices are the same. If you decide to exercise your options and buy your shares, you would have to pay $1 to get $1 in return. In this situation, your options are considered “at-the-money.”
Can exercise change prices?
Can options strike price change?
The strike price of a bought or sold option cannot be changed once that option is traded. Rather, the strike price of the option is predetermined. The only way to change the strike price for a trade is to offset that trade and then buy or sell an option at a different strike price.
Is the exercise price of a stock option equal to FMV?
When a stock option is granted to an employee, great care must be taken to ensure that the exercise price is equal to or greater than the stock’s fair market value (FMV) on the option’s grant date.
Is there any guidance for determining the stock’s FMV?
Fortunately, the regulations under Sec. 409A provide guidance for determining the stock’s FMV.
What is a modification of a stock right?
A modification is any change in the terms of a stock right that may provide the holder of the stock right with any direct or indirect reduction in the exercise price of the stock right regardless of whether the holder actually benefits from the change. When a stock right is “modified” it is treated as the grant of a new option grant.
How are stock options priced in early stage companies?
The stakes have gotten much higher with respect to early stage companies pricing stock options. The general rule is that the exercise price of the stock option cannot be less than the fair market value of the stock underlying the option determined on the date of grant.