Exercising Without Cash: A Smoother Path to Liquidity for Certain Vested Optionholders

Jonathon Lieberman
May 25th, 2020


When private company employees talk about selling their stock options, they’re not actually talking about selling their stock options.  Nearly all private company option grants prohibit the sale of stock options.

When private company employees talk about selling their stock options, they’re actually talking about selling the shares they receive upon exercise of their stock options.  That is to say, option exercise is a prerequisite to a sale, and if you were granted options in an already established firm, it can be an expensive one.

The pandemic and attendant economic uncertainty have left many vested optionholders without the cash necessary to exercise their stock options in the traditional manner.   As a result, we’ve received a number of shareholder messages over the past few months exploring alternatives to traditional methods of option exercise. We wanted to shed light on two of these methods: net exercise and cashless exercise in connection with a secondary sale.

This post attempts to:

·        explain how employees can use net and cashless exercise mechanics to avoid having to go out of pocket for their option exercise;

·        provide a guide for employees to discover whether their company permits these forms of exercise; and

·        make EquityZenners available as a resource to employees and issuers who would like to learn more.

Exercising without cash? How?

Below we discuss two principal methods by which a vested optionholder can exercise his or her stock options without the need to pay the exercise amount[1] in cash directly to the company.

                Net Exercise

In a net exercise, instead of the vested optionholder, or a third-party purchaser, paying the company in cash to exercise the optionholder’s stock options, the optionholder instead pays the company in, well, vested stock options. That is, you surrender some portion of your vested stock options to exercise another portion of your vested stock options. An example:

As of today, you have 1,000 vested stock options in Liebsify, an imaginary late-stage, pre-IPO company. The exercise price, or “strike” price of your options is $20 per share. The fair market value of Liebsify stock, as of the company’s most recent 409A valuation is $40 per share. To exercise your 1,000 options, if you were paying in cash, you would need to find $20,000 (1,000 vested options x $20).

But you want to pay with vested options, which are worth $40.  A $20,000 exercise price divided by $40 equals 500 shares. You will surrender 500 vested options to the company, and in return receive the remaining 500 vested shares.

You couldn’t go out of pocket for $20,000 to get your 1,000 shares. But you were able to fork over exactly $0, and instead surrendered 500 vested options to get 500 vested shares.

Note that, as with most things in life, taxes will also factor in here[2]. Whether you have an incentive stock option (an “ISO”), where holders generally incur no tax liability upon exercise, or a non-qualified stock option (a “NSO”), where holders pay tax on the “gain” received upon exercise (here, the spread between the $40 fair market value and the $20 exercise price), any tax liability incurred upon option exercise can lead to additional options being withheld.

                Cashless Exercise in Connection with a Secondary Sale (a “Same-Day Sale”).

You may also be able to avoid going out of pocket for your exercise by having a third-party purchaser, such as an EquityZen fund, pay your exercise amount on your behalf.

In this example, your exercise price is the same, but instead of receiving the $40 fair-market value 409A price, you managed to negotiate a $50 per share purchase price with the EquityZen fund for all 1,000 shares. At the close of your transaction, the EquityZen fund simultaneously wires $20,000 (assuming no tax withholding) to Liebsify for your exercise, and the balance of $30,000[3] to you, the seller. Upon closing, Liebsify would issue a share certificate for 1,000 shares in the name of the EquityZen fund.

For Shareholders

We know this is a difficult time for many employees of private companies. Layoffs, as well as a public market volatility, have made employees think critically about the value of their private company stock and how liquidity might fit in to their longer-term financial plans.

If you’re unsure about whether your company permits net or cashless exercise, a good place to start is the language of your option grant.  You’ll want to pay particular attention to the “Method of Exercise”, “Method of Payment” or “Payment for Stock” sections.

If you see the words “cashless exercise” in any of these sections, that’s a good sign! Likewise, if there’s a section that describes a method of exercise by which you “surrender” either shares or options, that is a good indicator as well.

To know for sure what routes are available to you with respect to net exercise, cashless exercise, and secondary sales, you should contact your company’s stock administration team.

For Issuers

EquityZen has facilitated dozens of same-day cashless exercise transactions in its seven years of business, working with issuers as well as leading pre-IPO law firms to ensure shareholders can gain access to liquidity without the undue burden of going out of pocket for large exercise amounts.

With the recent volatility in the public markets, we’ve seen an increase in the number of shareholders inquiring about potential cashless exercise transactions, as shareholders who would have previously liquidated public market positions to exercise options are no longer in a position to do so. 

As with permitting employee and investor secondary sales more broadly, we have found that allowing employees to utilize net or cashless exercise as a means to exercise options either ahead of, or in connection with, a secondary sale, can serve as a strong employee morale and retention tool for issuers in an economic environment where more conventional methods of employee retention (raises, bonuses, etc.) may no longer be viable.


If you’re a seller who would like to explore using a cashless exercise in connection with a secondary sales, please contact Shannon O’Neill at shannon.oneill@equityzen.com.

If you’re an issuer who would like to discuss how to incorporate cashless exercise mechanics into your employee liquidity program, please contact Jonathon Lieberman at jonathon.lieberman@equityzen.com


This post is for informational purposes only and does not constitute tax or legal advice.

[1] This sum can include both: (i) the product of: (x) your exercise price (your “strike” price) multiplied by (y) the number of options you intend to exercise; and (ii) any applicable tax withholding.

[2] The tax consequences of option exercise are complex and can vary across shareholders, companies, states, and the specific type of option you were granted. The tax commentary in this post is meant merely to be a superficial examination of standard stock option tax consequences. We recommend you consult your own tax advisor if you have questions about the tax consequences relating to your option exercise.

[3] The purchaser may also deduct any placement fees due on the transaction.


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