Underwater Options

Stock options whose strike price is higher than the current fair market value of the company's stock — making them worth nothing to exercise.

Stock options are 'underwater' (or 'out of the money') when the exercise price (strike price) is higher than the current fair market value of the underlying stock. If your options have a $10 strike and the stock is worth $6, exercising would cost you $10 to receive something worth $6 — a loss. Underwater options have no practical economic value as long as they remain underwater. They're most common at startups that raised money at high valuations that have since declined, and at public companies whose stock price has fallen below the grant price.

Underwater options become above water only if the stock price recovers above the strike price. For private companies, this means either a valuation recovery in a new funding round or an exit event above the strike. For public companies, it means a stock price recovery. There's no guarantee of either outcome — many options expire worthless. The standard term for options is 10 years from grant (subject to post-termination exercise windows), giving underwater options some time value as a potential lottery ticket.

Companies sometimes address mass underwater options through 'repricing' — resetting the strike price to the current fair market value for all employees. Repricing requires board approval, is sometimes contingent on a new vesting period, and has accounting and tax implications. Alternatively, some companies do an 'option exchange' where employees surrender old underwater options for fewer new options at the current, lower strike. Both approaches are controversial with investors but help retain employees when equity comp is essentially worthless.