Evaluating whether to employ a cash or cashless exercise of your stock options can be difficult. Nothing about the topic is easy, nor is it easy for amateurs to navigate.

This topic falls under financial planning , a graduate-level elective for the Financial Planning nerd ahem…me. Or even better, find someone who already is an expert! Each strategy has its own advantages and disadvantages. Below is a concise attempt to evaluate this multifaceted subject by addressing what I believe are the key issues. Essentially, this is the Cliff Notes version of that page textbook that your finance professor assigned you in college. If the goal is to control as many shares of company stock as possible, then a cash exercise is the best option.

A cash exercise entails the following:. Depending on the number of vested shares that you are eligible to buy, the out-of-pocket cost of a cash exercise may be in the hundreds of thousands of dollars.

If you are one of the lucky few with that sort of cash on hand, these are a few highlights of a cash exercise:.

Typically, clients who choose a cash exercise are planning to hold the company stock in the medium and long term. Holding on to the company stock exposes the investor to both the upside and downside risk of the markets.

If the stock price goes up, you win. If the stock price goes down, you lose. A cashless exercise can be designed to cover only the cost of the shares that you need to purchase, the tax liability you will incur on the exercise of your shares, or both.

Again, the choice of how many shares you wish to buy and hold and how many shares to buy and sell depends on the grant price of your shares and the current price of the stock.

Cash vs. Cashless Exercise | Finance and Flip Flops

When you are given stock or stock options as part of your compensation package, it may offer a fantastic opportunity to create substantial wealth. Because of this opportunity, you should take the adequate care to ensure the decisions you are making are opportunistic and in your best interest.

Cashless Exercise of ISOs

Often more complicated than what a novice can handle. If you find yourself in this situation, I encourage you to be a quick study or to hire the services of a qualified professional. None of the information in this document should be considered as tax or legal advice.

You should consult your tax and legal advisors for information concerning your individual situation. Diversification does not guarantee a profit or protect against a loss.

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Cashless exercise: Why few people keep shares

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Exercising employee stock options - May. 28,

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