Call Option

A call option is a type of option contract in which the holder of the option has a right, but not an obligation, to purchase shares at a set price (called the “strike price”) on or prior to the expiration date of the option. A holder of a call option benefits from increases in the value of shares over the strike price as the holder can purchase the shares at a discount relative to the market price. In startup equity financing, investors sometimes take call options that are exercisable in connection with a liquidity event (business sale, public offering or investment round over a certain threshold), allowing the investor to realize a return based on the amount the sale value exceeds the strike price. Granting investors options that are only exercisable in certain liquidity conditions can be more convenient for the investor and the company as the investor, as merely an option holder and not a holder of equity in the company, will not participate in equity holder decision making of the company. Call options are also common in employee stock option grants and can include vesting conditions and other timing restrictions, such as an outside date by which the option must be exercised.