Cashless exercise at company’s option: Overview, definition, and example
What is cashless exercise at company’s option?
Cashless exercise at the company’s option is a provision in an option or warrant agreement that allows the issuing company to settle the exercise of stock options without requiring the holder to pay cash. Instead of paying the exercise price in cash, the company withholds a portion of the shares equal to the exercise cost and issues the remaining shares to the holder.
For example, if an employee has stock options to buy 1,000 shares at $10 per share but does not want to pay $10,000 in cash, the company can deduct the equivalent value in shares and issue the remaining shares to the employee.
Why is cashless exercise at company’s option important?
This provision benefits both the company and the option holder by providing flexibility in exercising stock options. It allows employees, investors, or executives to acquire shares without needing to provide upfront capital.
For the company, a cashless exercise at its option helps manage liquidity by avoiding cash payments while still fulfilling its obligations under stock option agreements. This approach is commonly used in executive compensation plans, stock incentive programs, and investor agreements.
Understanding cashless exercise at company’s option through an example
An executive holds 5,000 stock options with an exercise price of $20 per share, and the company’s stock is currently trading at $50 per share. If the executive exercises the options, they would need to pay $100,000 (5,000 × $20).
Instead of requiring cash, the company applies a cashless exercise and withholds 2,000 shares to cover the exercise cost (2,000 × $50 = $100,000). The company then issues the remaining 3,000 shares to the executive, completing the transaction without a cash payment.
In another case, an investor holds warrants to purchase 10,000 shares at $5 per share but does not want to pay $50,000 in cash. If the stock is trading at $15 per share, the company can deduct 3,333 shares (equivalent to $50,000) and issue the remaining 6,667 shares to the investor.
Example of a cashless exercise at company’s option clause
Here’s how a cashless exercise at company’s option clause might appear in a contract:
“At the Company’s option, the Holder may exercise this Warrant on a cashless basis, whereby the Company shall withhold a number of shares equal to the aggregate exercise price and issue the remaining shares to the Holder. The number of shares withheld shall be calculated based on the fair market value of the Company’s stock at the time of exercise.”
Conclusion
Cashless exercise at the company’s option allows option or warrant holders to acquire shares without making an upfront cash payment. This provision provides financial flexibility, benefits employees and investors, and helps companies manage liquidity without requiring cash transactions. Including a well-defined cashless exercise clause in agreements ensures transparency in stock option plans and aligns incentives between the company and shareholders.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.