Net Exercising Your Stock Options

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Net exercising (cashless exercise) is when you sell some of your shares in order to cover the cost of your option exercise

Net exercising is essentially a cashless exercise where you tally up the total net value of your stock options based on the number of vested shares multiplied by the spread between the current Fair Market Value (FMV) and your strike price(s). That total value is then divided by the current FMV to determine how many shares you get to keep. This total value is then taxable to you at ordinary income tax rates. Since your stock isn't actually liquid yet, the tax obligation from a cashless exercise can be quite burdensome.

Private companies rarely offer a cashless exercise feature because the stock options were meant to be a retention tool, but a cashless exercise makes it easy for employees to leave the company without abandoning their option grants. When they do offer it, it is usually available only after liquidity is available for the stock to address the associated taxes. In those situations, the formula above is multiplied by (1 - Tax Rate) to calculate the reduced number of shares you retain. If the feature isn’t explicitly listed as a feature of your option grant, then attempting to simulate it by selling shares and buying shares could cause double taxation. First you exercise the options which triggers taxes. Then you sell the shares which triggers more taxes. Whatever money is left can be used to exercise more shares that you keep. But that final exercise triggers taxes, too. This sequence of repeated taxation is usually a disaster. A much more efficient tax solution is available by obtaining non-recourse financing from the ESO Fund.

This innovative service promotes and enables a healthier relationship between companies and employees. I my opinion it's valuable to employees and great for the overall tech environment and economy. It is good for nobody when employees feel trapped because they can't afford to leave. In less extreme cases exercising can be expensive and somewhat risky and this is simply a good smart hedge and a good square deal. Brilliant!

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