TLDR:
The exercise price (also called the strike price) is the predetermined price at which an option holder can buy (call option) or sell (put option) the underlying asset when exercising the option.
Exercise Price in Employee Compensation
For employee stock options, the exercise price must equal the fair market value (FMV) of the stock at the time of grant to qualify for favorable tax treatment under Section 409A of the US tax code. Companies determine FMV through 409A valuations — independent appraisals conducted by specialized valuation firms — which typically assess the common stock value at a discount to preferred stock price due to liquidation preference and other investor protections. Granting options below FMV results in immediate income recognition and potential excise taxes for employees, making 409A compliance a critical administrative requirement for startups.