What is Exercise of Stock Options?
Nexa Consultancy | Startup & Finance Glossary
Exercising a stock option is the act of an employee purchasing shares of the company's stock at the predetermined "strike price" granted to them in their option agreement. This can only be done after the options have vested.
Base Term for Startups: The decision of when to exercise options can have significant tax implications for an employee. It converts the "option" into actual "shares," making the employee a legal shareholder in the company.
Process: The employee notifies the company of their intent to exercise, pays the total strike price for the number of shares they are purchasing, and then receives the shares. In India, the difference between the Fair Market Value (FMV) at the time of exercise and the strike price is taxed as a perquisite (salary income).
Base Term Example: An employee has vested options to buy 1,000 shares at a strike price of ₹10. They decide to exercise them. They pay the company ₹10,000 and become the owner of 1,000 shares.