Payment of exercise price: Overview, definition, and example
What is payment of exercise price?
Payment of exercise price refers to the process by which a holder of a warrant, option, or similar financial instrument pays the agreed-upon price to exercise their right to purchase or acquire the underlying asset (such as shares of stock) as specified in the terms of the agreement. The exercise price (also known as the strike price) is the price at which the holder can buy the underlying asset, and it is typically set when the warrant or option is issued.
For example, in a stock option agreement, the exercise price is the price per share at which an employee can purchase the company's stock under the option. The payment of this price is required for the employee to exercise their option and acquire the shares.
Why is payment of exercise price important?
The payment of exercise price is important because it triggers the action of exercising the option or warrant, allowing the holder to acquire the underlying asset. Without this payment, the holder cannot complete the exercise, and thus cannot acquire the asset at the agreed-upon price.
For businesses or issuers of the warrants or options, the payment of exercise price results in the receipt of funds, which may be used for operational needs or other purposes. For holders, this is a key step in obtaining the underlying asset at a favorable price, and it may represent an opportunity for profit, especially if the market value of the asset has risen above the exercise price.
Understanding payment of exercise price through an example
Imagine an employee of a technology company has been granted stock options as part of their compensation. The options give the employee the right to purchase shares of company stock at an exercise price of $50 per share. The stock’s market price has increased to $100 per share, and the employee decides to exercise the options. To do so, the employee must pay the exercise price of $50 per share to acquire the stock, resulting in a net gain if the shares are later sold at market price.
In another example, a bondholder holds a convertible bond with an option to convert the bond into shares of the issuing company. The exercise price for the conversion is set at $10 per share. If the bondholder decides to exercise the conversion option, they must pay the exercise price of $10 per share in order to convert the bond into equity.
An example of a payment of exercise price clause
Here’s how a payment of exercise price clause might appear in an option or warrant agreement:
“To exercise the Warrant, the Holder shall pay the Exercise Price of $[X] per share to the Company in cash, by certified check, or by wire transfer to the account specified by the Company. The Holder shall complete the payment of the Exercise Price for the number of shares being purchased under the terms of this Warrant.”
Conclusion
The payment of exercise price is a critical step in exercising a financial instrument like a warrant or option, as it allows the holder to acquire the underlying asset at the predetermined exercise price. This provision ensures that both the issuer and the holder understand the financial terms and conditions necessary to exercise the option or warrant. For the holder, it offers the potential to profit from favorable market conditions, while for the issuer, it ensures that funds are received when options or warrants are exercised.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.