Cashless exercise

Cashless exercise

Author: The Carta Team
Read time:  2 minutes
Published date:  5 June 2024
Learn how a cashless exercise of stock options works, including tax implications to consider when exercising ISOs or NSOs.

When you exercise stock options, you’re purchasing shares of your company’s stock at a set price (the strike price). There are a few different ways to exercise stock options, depending on your company’s preferences: with cash or without cash, also known as a “cashless exercise.”

What is a cashless exercise?

A cashless exercise is when stock is purchased without exchanging cash. Instead, the option holder uses some of the shares that were subject to the exercise to cover the cost of exercising.

How does a cashless exercise of stock options work?

Cashless exercises come in two forms for public companies or private companies holding a tender offer.

  1. Exercise and sell to cover: When selling to cover, you simultaneously exercise your stock options and sell enough shares to cover the purchase price (plus applicable fees and taxes). You can then retain all your remaining shares or sell them.

  2. Exercise and sell: In this scenario, also known as a “same-day-sale,” you exercise and sell all of your options in one transaction. You keep the money that remains after the sale (minus the purchase price, applicable fees, and taxes).

Not all companies allow cashless exercises for employee stock options, so check to see if yours does before exercising and check with your tax advisor in general.

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Benefits and risks of cash exercise

Cashless exercising is less risky than paying cash because you avoid investing your own money to pay exercise costs. It can be beneficial if you have less personal liquidity or if you want to avoid the out-of-pocket expense of exercising with cash.

Tax considerations

Selling shares right after exercising prevents you from taking advantage of certain tax advantages, especially for incentive stock options (ISO). Non-qualified stock options (NSO) have different tax liabilities than ISOs.

Contact a certified financial professional (CFP) or tax advisor to learn more about tax implications before exercising your options.

→ Learn more about stock option tax treatment for ISOs and NSOs.

Employer considerations

Companies interested in offering cashless exercise of stock options to employees have several considerations including the impact on finances, employee retention, and regulatory requirements.

Creating a proper stock option plan is a key step before you issue stock options to employees, advisors, or other service providers. Carta works with thousands of founders every day who are just beginning the journey of creating their first stock option plan.

Download our free equity templates to get started:

The Carta Team
While we believe in assigning ownership at Carta, this blog post belongs to all of us.
DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. ("Carta"). This communication is for informational purposes only, and contains general information only. Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. ©2024 eShares, Inc. dba Carta, Inc. ("Carta"). All rights reserved. Reproduction prohibited.