Cashless Exercise

Cashless Exercise

A method of exercising employee stock options in which the employee borrows enough money from a broker to buy the underlying stocks and immediately resells enough shares to pay the loan, in addition to taxes and commissions. This is a form of buying on margin; ordinarily, most brokers would not allow the employee to buy on margin, but, in cashless exercises, they receive repayment almost at once. This results in a profit for both the broker and usually for the employee as well.
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Following the conversion within the company's fully diluted capital, there is no net effect on the available share capital (headroom), which is however improved slightly by the cashless exercise of warrants to 142,906,743 shares.
Effective 5 April 2016, HEC has issued 2,930,232 shares to TINA upon TINA's cashless exercise of a warrant to purchase up to 7m shares at USD 0.
Each warrant includes cash and cashless exercise features, as well as an exchange feature.
The end result is that upon cashless exercise by the transferee/nonemployee spouse, the employer remits that spouse a check equal to the spread between the value of the stock and strike price reduced by supplemental withholding (at the appropriate flat rate) and employment tax withholding (calculated using the transferor/employee's wages to date).
The warrants are immediately exercisable, expire three years after issuance, have a cashless exercise feature, and may be exercised to purchase unregistered shares of the company's common stock at an exercise price of USD0.
The IRS held that a taxpayer's cashless exercise of stock options resulted in taxable income to the taxpayer and a compensation deduction for the company that issued the options.
The Class B warrants are exercisable automatically on their expiration date by cashless exercise, or expire without exercise.
Cashless exercise--An alternative funding approach is the cashless exercise of the options in which the executive short-sells the shares.
While most employees choose the cashless exercise, whereby the underlying shares are sold in their entirety, some executives may wish to acquire all the shares in order to build ownership.
Because of the issues raised by the Act, companies should consult their securities counsel and carefully consider whether it is prudent to suspend their cashless exercise programs for directors and executive officers pending guidance from the Securities and Exchange Commission or other developments.
Cashless exercise is always available where the employee simultaneously exercises and sells NQ shares, the company withholds the appropriate taxes, and the employee is given cash for the net balance.
Before discussing these techniques, however, it should be noted that some of the most popular measures for facilitating the exercise of options by employees with limited funds -- for example, so-called cashless exercise programs, often involving the financing of the exercise price through a broker and an immediate sale of the shares so purchased to the extent necessary to pay the loan -- do not work well in the ISO context because of the disqualifying disposition rules.