Fair Market Value (FMV)
The price at which a willing buyer and seller would agree to transact for a share.
Definition
Fair market value is the price that a knowledgeable, willing buyer and a knowledgeable, willing seller would agree upon, with neither under compulsion. For private companies, FMV of common stock is established by a 409A valuation. For public companies, it is simply the stock price. FMV is critical for tax purposes because it determines the taxable gain when you exercise options.
Why it matters
When you exercise stock options, the difference between FMV and your strike price determines your tax liability. If the FMV has risen significantly above your strike, exercising may trigger a large tax bill (especially for ISOs via AMT).
Example
You have ISOs with a $2 strike price. The current 409A FMV is $10. If you exercise, the $8 spread per share is a tax preference item for AMT purposes. On 10,000 shares, that is an $80K AMT adjustment.