Lot’s of employees struggle to come up with the extra cash necessary to pay to exercise their options. Cashless exercise gets thrown around a lot as an attractive option in this scenario but it’s not one that’s always available. First let’s get some assumptions out of the way: Let’s assume that the options are either early exercisable and/or vested. So the employee has every right to purchase the shares but realizes, “Eeek, I can’t pay for this!” – rest assured there are usually options.
Cashless exercising or same-day-sales are one option open to employees of public companies as well as some private companies. Cashless exercising is when you borrow money (usually from a broker) to purchase the shares and simultaneously sell enough of your shares to repay the broker +taxes + broker fees (if any).
Understandably, this option is dependent on the availability of a secondary market for the shares. Most private companies do not have a secondary market and generally only those that do will allow employees to cashless exercise. So unless you work for a highly sought after private company, you may not have the ability to cashless exercise.
Don’t worry, most private companies provide other “cashless” exercise options, such as: Promissory Notes, Surrender of Stock and/or Net Exercising.
A promissory note is essentially a loan. The company loans the employee the purchase price of the stock and in exchange the employee promise to repay the company the full amount plus interest by a certain agreed to date. In addition, the employee pledges the stock as security for the loan – meaning, if the employee doesn’t repay the company, they company has the right to take the stock. While many companies may include this option in their stock plans, it’s fairly rare for a company to actually make a loan to an employee. However, it never hurts to ask if your stock plan allows for it!
Surrender of Stock
If you already hold shares of common stock in the company, you may be able to surrender the number of shares equal to the fair market value of the option shares.
Similar to the surrender of stock, net exercising involves using a portion of your option shares to pay the full purchase price. The company determines the fair market value of the options at the time of exercise and reduces the total number of shares issued to the employee by the number of shares necessary to pay the full exercise price plus any required tax withholdings.
To figure out whether your private company allows any of these options, either check your option grant paperwork and the company stock plan or ask the company. Keep in mind that no matter how you do it, exercising your options could have tax implications. Make sure to talk to your personal tax advisor or an attorney before purchasing your shares.
Also, check out Paysa’s equity compensation resources for additional information!