How to Set an Option Exercise Price for Startup Equity in Australia

If you’re building a startup and considering an employee or adviser equity plan, one of the first (and most important) commercial decisions you’ll face is setting the option exercise price.

Set it too high, and your options may not feel meaningful to the people you’re trying to attract and retain. Set it too low (or set it incorrectly), and you can create tax headaches, compliance risks, and investor friction later.

The good news is you don’t need to guess. In Australia, there are practical, widely used approaches to setting an option exercise price that align with your company stage, your fundraising plans, and the way options are typically documented.

Below, we step through how to think about the option exercise price from a founder’s perspective, what inputs you’ll need, common methods, and the legal documents that usually sit around the decision.

What Is An Option Exercise Price (And Why It Matters)?

The option exercise price (sometimes called the “strike price”) is the amount a holder must pay to convert their option into a share.

In plain terms, an option gives someone the right (but not the obligation) to buy shares in your company later at a fixed price. That fixed price is the exercise price.

For founders, the exercise price matters because it affects:

• Incentive value: If the exercise price is close to (or above) your company’s future value, the option may feel pointless. If it’s well below future value, it can be a strong incentive.
• Tax and compliance outcomes: In Australia, employee share and option arrangements can trigger tax outcomes depending on how the option is structured and priced. You should speak with a qualified tax adviser or accountant about your specific situation.
• Investor confidence: Investors often want to see that equity incentives are issued under a consistent plan with sensible pricing logic.
• Fairness across the team: People joining at different times will compare terms, including exercise price, vesting and the number of options granted.

It’s also worth remembering that your exercise price is typically paired with other key terms such as vesting, expiry, treatment on exit, leaver provisions, and whether options are subject to performance milestones. Price is only one part of the “value” of an option grant.

What Inputs Do You Need Before You Set The Exercise Price?

Before you choose a number, it helps to be clear about what you’re actually trying to achieve and what constraints you’re operating under.

Your Current Company Value (Or A Proxy For It)

Many founders want to set an exercise price that reflects a reasonable view of the current share value. But “value” can mean different things depending on your stage:

• Pre-revenue / pre-fundraise: You may not have a clear market price, so you’ll often rely on a founder valuation view or an early adviser valuation.
• Post-fundraise: You may have a clear reference point (for example, the price investors paid) that influences what feels commercially consistent.
• Approaching a raise: You may need to balance motivating your team today with the optics of issuing options right before a priced round.

How you document and support your valuation approach becomes more important as you grow and your cap table becomes more complex. In practice, many startups also get support from qualified valuation or tax advisers when settling on a defensible approach.

What Class Of Shares The Options Convert Into

Options usually convert into ordinary shares, but your company may have (or plan to have) preference shares for investors. If your capital structure includes different rights, the “value” of each class may differ.

If you’re thinking about multiple share classes (or you already have them), it’s worth getting your structure clear early, because it can change how you think about pricing and how you communicate the option’s value to team members. The mechanics here often tie into Different Classes Of Shares and the rights attached to each class.

How You’re Planning To Issue And Manage Equity

Your option exercise price sits inside a broader equity framework. For example:

• Are you granting options under an employee share option plan (ESOP) or offering one-off bespoke options?
• Do you have more than one founder or shareholder who needs alignment on equity decisions?
• Are you expecting to bring in investors soon, where they’ll want to see a clean and consistent equity plan?

This is where your core company governance documents matter. A well-drafted Company Constitution can support how shares and options are issued, and a strong Shareholders Agreement can set expectations around approvals, transfers, drag/tag rights and what happens on an exit.

Whether The Option Holder Is An Employee, Contractor, Or Adviser

From a founder’s perspective, you’ll often use options to align incentives for:

• Employees (especially key hires)
• Contractors (for longer-term roles or critical build phases)
• Advisers and mentors (usually smaller grants with shorter vesting)

These groups can be treated differently in your documents, and different commercial norms often apply. For example, adviser options might have faster vesting but shorter expiry periods.

Common Ways Australian Startups Set An Option Exercise Price

There isn’t one “correct” exercise price for every startup. But there are common approaches that founders use depending on the stage of the business and how defensible the valuation needs to be.

1. Set The Exercise Price At (Or Near) Current Fair Market Value

This approach aims to align the option exercise price with a reasonable estimate of the current share value.

Practically, “fair market value” for a private startup is often determined using:

• a third-party valuation report (more common as you scale)
• a board valuation approach (supported by evidence)
• recent fundraising price (if you’ve done a priced round)
• an internal valuation methodology documented in board minutes

Founders like this approach because it can reduce the risk of later arguments about whether options were granted at a discount to value at the time of grant, which can be relevant to tax and compliance treatment. For tax outcomes, it’s important to get advice from a qualified tax adviser or accountant based on your specific plan and circumstances.

It can also look clean to investors because it shows options are being priced with a reference point rather than as an arbitrary discount.

2. Use The Most Recent Priced Round As A Reference Point (But Be Careful)

If you recently raised capital in a priced round, it’s tempting to set the exercise price equal to the price investors paid.

That may be appropriate in some situations, but founders should be careful about assuming the investor price automatically equals the value of the shares the option converts into. Investor shares may carry different rights (for example liquidation preference), and the price investors pay may reflect those rights.

In practice, many startups still use the last round price as a “headline” reference point and then take advice (including from valuation and tax advisers) on whether an adjusted value is more appropriate for ordinary shares.

3. Set A Nominal Or Low Exercise Price (Early Stage Only)

At the very earliest stage, some founders set a low exercise price (for example, a nominal amount per share) to maximise upside and simplify conversations with early team members.

This can be commercially compelling, but it needs to be handled carefully. A very low exercise price can attract scrutiny if it doesn’t align with a reasonable view of current value, particularly once you have revenue, customers, or investor interest.

It can also create awkwardness later if your company value climbs quickly and you need to explain why early options had a very low strike price. That doesn’t mean it’s “wrong” to do it, but it does mean you should document your reasoning, seek appropriate professional advice where needed, and be consistent.

4. Stage The Exercise Price Based On Seniority Or Grant Date (Consistency Is Key)

Another practical approach is to keep exercise prices consistent within a “grant window” (for example, a quarter), and update the price periodically as the business progresses.

This can help you avoid having a different exercise price for every hire, while still reflecting growth over time.

If you do this, it’s important to have a clear internal policy on:

• when you reprice (eg after a funding round, annually, or on a board-approved schedule)
• what evidence you use to justify the updated price
• who approves it (board or shareholders, depending on your structure)

Practical Founder Considerations (Beyond The Number)

Even if you land on an exercise price that seems “right”, you’ll want to stress-test it against how options actually get used in real life.

Will People Actually Exercise The Options?

Options only convert into shares when they’re exercised. That usually happens when there’s a liquidity event (like a sale) or when the option holder wants to become a shareholder.

If your option exercise price is high, and you don’t have an easy “cashless exercise” mechanism, you may find:

• option holders can’t afford to exercise when the time comes
• the incentive effect is weaker than you expected
• your cap table outcomes on exit are messy because fewer options convert

From a business owner’s perspective, you want your equity plan to be motivating and workable, not just technically correct.

How Long Is The Option Term (Expiry)?

Exercise price and expiry work together. If an option expires too soon, even a great exercise price may not matter because the holder doesn’t have time to benefit from growth.

Common terms include 7–10 years for employee options, but earlier-stage companies sometimes use shorter periods for advisers or contractors. What’s “right” depends on your commercial intent and your plan design.

How Does Vesting Interact With Price?

Vesting controls when the option can be exercised. A typical structure is a 4-year vesting schedule with a 12-month cliff, but it can vary.

A lower option exercise price can sometimes justify stricter vesting (from a commercial fairness standpoint), but the key is clarity. If the terms are confusing, the incentive loses its impact.

How Do You Avoid Unintended Dilution And Cap Table Surprises?

Founders often focus heavily on the exercise price and forget to model what happens when options convert into shares.

Before you finalise your option grants, it’s worth modelling:

• the fully diluted cap table (including your option pool)
• how much dilution founders and investors take when options are exercised
• what happens to voting power and decision-making thresholds

If you’re unsure how to approach this, it can be useful to get advice early, particularly if your company already has investors or you’re about to raise.

What Legal Documents Should Support Your Exercise Price Decision?

In Australia, it’s not enough to “agree in Slack” that someone has options at a particular strike price. You’ll want the terms properly documented, and you’ll want your corporate approvals and cap table records consistent.

While the exact documents depend on your structure and stage, the most common ones include:

• Option Plan / ESOP Rules: This sets out how options work across the business (eligibility, vesting, exercise mechanics, leaver rules and treatment on an exit). Many startups implement this through an Employee Share Scheme style framework.
• Option Offer Letter: This is the individual grant document setting out the number of options, option exercise price, vesting schedule, expiry, and key conditions.
• Shareholders Agreement: This is where your broader shareholder rules sit, including transfers, founder restrictions, and what happens on a sale. It’s common for option plans to “plug into” the Shareholders Agreement so everyone is operating under the same playbook.
• Company Constitution: This supports the rules around issuing shares and different classes of shares, and can be important when implementing equity incentives. A tailored Company Constitution can help avoid procedural issues later.
• Employment Contract (Where Relevant): If the option holder is an employee, you’ll usually want the equity plan to align with the broader employment terms (confidentiality, IP ownership, restraint provisions and termination mechanics). An Employment Contract is often part of that foundation.
• Fundraising Documents: If you’re raising soon, your equity plan will often be reviewed alongside your capital raising documents such as a term sheet (even if the option exercise price isn’t negotiated line-by-line, investors may want comfort that the ESOP is structured sensibly).

Just as importantly, you’ll want to keep accurate board minutes and shareholder resolutions approving:

• creation or top-up of an option pool
• adoption of an option plan (if applicable)
• each grant of options (often board-approved)
• issue of shares on exercise

This governance layer is what helps your equity plan stand up under due diligence later, whether that’s for fundraising, a major partnership, or a business sale.

Key Takeaways

• The option exercise price is the price an option holder pays to convert their option into shares, and it impacts incentives, tax outcomes, and investor confidence.
• Before setting an exercise price, you should consider your current valuation (or a defensible proxy), your share classes, your fundraising timeline, and who the options are being granted to.
• Common approaches include pricing at current fair market value, using the last priced round as a reference point (with care), or using a low early-stage price supported by consistent reasoning and documentation.
• Exercise price should be set alongside other key terms like vesting, expiry, and exercise mechanics so the equity actually works in practice for your business and your team.
• Your option plan should be backed by the right legal documents and approvals, including a properly structured option plan, grant letters, and supporting governance documents like a Company Constitution and Shareholders Agreement.

Finally, this guide is general information only and isn’t legal or tax advice. Because option pricing and valuation can affect tax outcomes, it’s a good idea to get advice from a lawyer and a qualified tax adviser or accountant before you finalise an ESOP or option grants.

If you’d like a consultation on setting up an employee option plan and choosing the right option exercise price for your startup, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.