How a Cashless Exercise Works

When a private company grants you employee stock options, it gives you the right — but not the obligation — to purchase shares in the business. That right becomes available after a specified period (known as “vesting”) and allows you to buy shares at a predetermined cost, called the “strike price.” To actually own those shares, you need to “exercise” your options, meaning you pay that strike price. This can come at a significant cost, especially if you hold a large number of options.

One method many employees use is a “cashless exercise,” also known as a “simultaneous exercise and close.” A cashless exercise lets you buy your shares without using any of your own money upfront. It involves completing two transactions at once: you exercise (buy) your options, and sell enough of those shares at the same time to cover the costs.

How a Cashless Exercise Works

Imagine you have 1,000 stock options in a private company. Your strike price (which doesn’t change, regardless of the company’s valuation) is $1 per share.

Step 1: Figure Out Your “Buy” Costs

If you want to turn your 1,000 options into 1,000 shares, you’ll need to pay the company your strike price multiplied by the number of shares. In this case, it will be ($1 x 1,000), meaning you’ll owe your company $1,000 to exercise them all.

Step 2: Work Out the Value of Your Shares

Research the current valuation of the company’s shares today. Let’s say you determine that they are now worth $10 each. To work out the total value of all your shares, multiply this amount by the number of shares you have. For this example, the total would be ($10 x 1,000), so $10,000.

Because you only need to pay $1,000 to exercise, you’ll make a theoretical profit of $9,000 (before taxes or other fees) if you sell all of your shares.

Step 3: Find a Buyer for Your Shares

If you don’t have the $1,000 to exercise your shares, or you don’t want to pay this money upfront, your company might allow you to take part in a cashless exercise (more on this below). To do so, you’ll need a buyer. You can find one by accepting a tender offer from your company, working with a traditional broker, or placing a sell indication for your vested options on a platform like Mirai Capital.

Step 4: The Simultaneous Transaction

You won’t handle the transaction yourself — an administrator will take on that role. The organization that acts as this coordinator will differ depending on how you choose to sell your shares.

At the same moment (or very close to it):

  • The buyer will send $10,000 to the administrator.
  • The administrator will send $1,000 of that money to the company (plus any taxes owed). This covers your cost to exercise all 1,000 of your options.
  • The company will directly give the buyer these 1,000 newly exercised shares.
  • The administrator will then give you the remainder of the money. The amount will be the total sale value, minus the price that was sent to your company to cover the exercise cost. In this example, you would receive $9,000 (excluding taxes, fees, or other charges).

If You Don’t Want to Sell All of Your Stock Options

Remember: you don’t need to sell all your stock options at the same time. A popular method is to sell enough options to cover the cost of the exercise (which in this case would be 100 shares, because the value of those shares is $10 and the cost to exercise is $1,000). In this instance, the 100 newly exercised shares would be transferred directly to the buyer as part of the sale, and you would keep the remaining 900.

Taxes

While a cashless exercise works this way in theory, in practice you have to account for taxes. Every exercise and sale will come with its own unique tax implications, depending on the type of shares you have, where you’re located, and your individual finances. You’ll need to work with a professional to understand your personal situation before you begin a cashless exercise.

When you actually take part in the transaction, the taxes usually aren’t paid out of pocket. Typically, enough of your shares are sold (or withheld) to cover the exercise cost plus the taxes that your company is legally required to withhold on your behalf.

Company Permission

Not all companies will allow you to sell your private stock. Some will only let you sell under certain conditions, such as requiring that you’re a current employee. Before you get too deep into planning your cashless exercise, make sure you understand your startup’s stance on secondary sales. You can usually find this information in the shareholder agreements on your company’s stock option administration platform, like Carta or Shareworks. If you’re still not sure, you can reach out to your company directly, or contact Mirai Capital, which will either know if the business permits cashless exercise or can help you understand its policy documents.

Choosing an Administrator

Cashless exercises can be complex transactions, and they often involve a collaborative effort between the business and external financial service providers. As well as not every company supporting the process, not every stock plan administrator will be able to complete the sale, and you’ll need to investigate your specific circumstances before you transact.

One way to complete a cashless exercise for your private stock is through an investing platform like Mirai Capital, which provides this service free of charge. Mirai Capital lets you list your vested stock options for sale, and you can match with interested buyers who are accredited investors, including institutions. To do so, you place a sell indication for your shares anonymously, and Mirai Capital handles the administration and company-specific requirements of the sale for you, such as any “right of first refusal” clauses. If you are paired with a buyer, you don’t have to accept their price if it is below your sell indication’s target, and you don’t have to pay any fees to place a sell indication.