What is the meaning of:
A simple definition of “cashless exercise” is “to purchase stock or exercise stock options without spending any money.”
Many employees are awarded the right to purchase company stock at a discount, or are given stock options as part of their overall compensation packages. Often, though, they don’t have the available money or other resources to take advantage of this opportunity.
There are three ways to purchase employer-awarded stock, or exercise employer-awarded stock options: (i) with cash, (ii) by stock swaps, and (iii) through “cashless exercise.”
Cash Exercise: This is the most straightforward path. The employee simply writes a check, and is then given the stock. Couldn’t be simpler, IF, that is, the employee has the available funds to do so.
Stock Swap: This is simply trading company stock you already own for the new stock you are offered at a discount. Since the stock you already own is worth full price, say $100 a share, and the exercise price of your stock options is, say $25 a share, by means of a stock swap, you can get 4 shares in exchange for every one share of company stock you presently own. (Sometimes called a “stock-for-stock exercise.”)
Cashless Exercise: Let’s say you have no cash or stock available for either a Cash Exercise or a Stock Swap, yet you really want to take advantage of stock options you own, especially if they have value and are soon to expire.
In a Cashless Exercise you (i) borrow the money needed to purchase the company stock or to exercise your stock options from a stock broker, (ii) purchase the stock or exercise the stock options, and then (iii) simultaneously or immediately sell some of the shares you now own to raise enough cash to repay the stock broker’s loan to you, as well as any commissions and applicable taxes.
Many companies that give their employees stock or stock options set up programs with brokers to facilitate “cashless exercise,” which has become the most popular method for employees to exercise company stock options.
If you have the right to purchase discounted stock or exercise stock options, but lack the available financial resources to do so, don’t overlook “cashless exercise.” It is a useful tool to secure a potentially valuable opportunity at work.
For more information, insight and inspiration regarding Stock, Stock Options and Equity at work, just [click here.]
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