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.
Related or Semi-related Video
Finance: What are the Return Dynamics of...137 Views
finance a la shmoop what are the return dynamics of investing in stocks versus
bonds well here's risk yeah and here's reward
take more of this and you get more of this but also this right stocks yeah [Man performs bike jump and holds trophy]
they're risky while they're risky in the short run
anyway here's a chart of the S&P 500 since the late 19th century Peaks
valleys Peaks valleys Peaks valleys it goes up a lot and down a lot but over
time it goes up a lot in fact over time the stock market has gone up by about 10
percent a year give or take and yeah there were long periods of time where [Man throws money into the air]
the market did way better than 10% and long periods where it did way worse and
don't forget you have to include dividend and dividend reinvestment when
you do these calculations all right so you can't invest in the stock market [Man giving lecture on stocks]
with a short term view really it's like navigating a ship with a magnifying
glass instead of a telescope if you're gonna take on the risk of the stock
market well you mitigate a lot of that risk by
just committing to own your basket of stocks for a very long time if you do
and history continues to repeat itself like a bad Thai food dinner well then [Person in a restroom cubicle]
you'll double your money about every 7 or 8 or 9 years something like that got
it okay the bond markets a completely different animal here our yields in the
early 1900's and here our yields around world war two and here our yields around
the 70s well note the skyrocketing numbers here is the Jimmy Carter [Interest rate history graph]
Administration tried hard to fight and then stomp out inflation and they did
but oh the price anyway and since then bonds have been on a long slow ride down
to the modern era where yields are almost nothing it's unprecedented to [A 100 dollar bill on the floor]
have such quote free money unquote but that's where we live in the world today
with government's desperate to stimulate inflation so that they can pay off their [Football being pumped up]
fixed debts easier so over the decades bond yields have come down and today the
ten-year t-bill yields about two or three percent depending on the weak you're
looking at it and corporate bonds yield modestly more because they're modestly more risky
they're yielding about four or five percent they're way safer both of these [A team of people waving]
then similar stocks that is government bonds and corporate bonds way way safer
than stocks less risk so what would you expect you know less reward and yeah cuz
bonds basically just boringly payoff only a very small handful of [Pennies drop]
bonds as a percentage of the total out there ever lose money by not paying
their full interest and their full principal generally on time where stocks
lose money all the time so that's it more risk more reward so if you've got [Person stacking poker chips]
lots of time with your investments put it in the stock market it's gonna go up
at a much higher rate than the bond market but if you're thinking about
buying a house in eighteen months well you probably can't afford the market
risk so you know sit tight [Man standing outside of a house for sale]
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