Financial Planning
Employee Option Payoffs: Model the Strike Before the Headline
Build an option payoff table from an assumed common-share price, then distinguish intrinsic value, exercise cash and realized proceeds.
What you will learn
- Calculate a stated option’s intrinsic payoff across price scenarios.
- Distinguish an unexercised option from shares already purchased.
- Identify costs and rights a simple payoff table excludes.
For a simple unexercised option, the strike comes before the headline payoff. Under a fully specified exercise-and-sale scenario, the gross intrinsic amount is eligible shares × the positive difference between the assumed common-share proceeds and the strike. That calculation is not an appraisal, a tax estimate or a reason to exercise.
Define the price that enters the model
Start with a stipulated amount available per common share, not a company valuation divided casually by a share count. The existing liquidation-preference lesson explains why rights and priority can change distributable proceeds. Here, those questions are resolved outside the model and the per-share input is simply assumed.
The SEC’s introduction to options describes a call as in the money when the underlying price exceeds its strike. Employee awards have their own terms; do not import listed-option contract sizes, transferability or trading methods.
Work a fictional option
Fictional inputs: an unexercised option covers 3,000 eligible shares at a $4 strike. Assume exercise and immediate sale are permitted in each scenario, the stated price is actually available to those shares, and no tax, fees, withholding, preference or other cost remains to subtract. These are teaching assumptions, not facts about an actual grant.
Gross exercise-and-sale illustration
| Assumed common-share proceeds | Purchase amount if exercised | Gross sale amount if exercised | Positive intrinsic amount |
|---|---|---|---|
| $2 | $12,000 | $6,000 | $0 |
| $4 | $12,000 | $12,000 | $0 |
| $6 | $12,000 | $18,000 | $6,000 |
| $11 | $12,000 | $33,000 | $21,000 |
At $6, the $18,000 gross sale amount is not the gain. Subtract the $12,000 purchase amount to get $6,000 before excluded items. At $2, the unexercised option has zero positive intrinsic amount; the table does not instruct the holder to spend $12,000 to receive $6,000.
Do not apply the zero floor to money already spent
A holder who previously purchased 3,000 shares for $4 each has a different position. Selling those shares for $2 produces $6,000 cash against $12,000 previously paid, a $6,000 loss before other items. The option’s zero intrinsic-value floor does not refund exercise money or prevent loss on stock already acquired.
Likewise, zero intrinsic value does not prove an unexpired option has zero economic fair value. Time, uncertainty, restrictions and other terms are outside this simple payoff model.
Build a complete question list
- Which quantity is actually eligible at the modeled event?
- Is the input a realizable common-share price or only a reference?
- What purchase payment, fees and withholding would be required?
- Which taxes and rights remain unresolved?
- When would cash leave and arrive?
- Which assumptions could fail before the event?
The IRS options overview separates exercise from later disposition. Keep those events separate in your records rather than treating every apparent spread as cash received.
Practice with one changed assumption
Keep 3,000 shares and the $4 strike, but assume only 1,800 shares are eligible at the stated $11 price. The positive intrinsic amount is 1,800 × $7 = $12,600, not $21,000. The remaining quantity needs its own eligibility explanation; it does not disappear into a footnote.
Keep the model useful, not persuasive
The finished artifact should make one scenario understandable and expose what is missing. Use the cap-table checklist to locate the source quantities. Keep your permitted scenario and open questions in Finta Documents and ask Aurora to help prepare a clear review brief. Do not treat the worksheet as a sell, hold or exercise recommendation.
Finta Field Guide. By Finta Editorial Team. Sources checked November 14, 2026. Examples are original, fictional teaching cases, not customer results or individualized legal, tax, accounting or investment advice.