Cashless Exercise

Cashless exercise is a way for employees to use their stock options to buy shares without using any of their own cash upfront. The process involves an extremely short-term loan, which is almost instantaneously paid back using proceeds from the stock transaction. Fundamentally, the company who has issued the options to the employee (usually as part of their compensation plan) has a trading desk set up to manage the sale of those options.

Joe Bleau was granted 50,000 options at a strike price of $5 a share. He has vested into 30,000 of them and with the company now public, he wants to sell all of them while the stock is hot at $22 a share. He can make a cashless exercise. Under the process, the bank making those trades loans him $150,000 for about 3 minutes (however long it takes to get the process done) to then legally exercise his options. Joe is then remitted a gain of $16 a share times the 30,000 shares he's selling. It was cashless because Joe didn't use any of his cash to exercise the options.

So the bank loans him money just long enough to buy the stock at the prearranged strike price, then immediately turns around to sell it at the current market price. The bank then uses the proceeds from the sale to pay itself back for the loan and gives the balance to Joe. Joe was loaned money for a second, owned stock for a second and then got a check that he can hold onto for however long he wants.