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 is an Annualized Return?36 Views
Finance, a la shmoop. What is an annualized return? Alright people, well
when you invest a dollar you hope or even expect to get more than a dollar [ATM machine]
back, at some point. And let's say you invested that dollar in Terminators
Closet -a leading dealer in cybernetic body enhancements. And it went from $1 a
share to a dollar ten six months later. Alright, nice return.
You made 10% in just six months but in most investing discussions ,investment [spreadsheet shown]
returns are discussed in the form of annual returns, not monthly or daily or
biannual numbers, so you need to convert your six-month return into an annualized [angelic glow]
one, and you can do the process here of computing that number that is if you made
10% in six months well then in a year presumably you could notion that you'd
have made 20%. It's not that you would have guaranteedly made 20% it's just [spreadsheet shown]
the math saying that well if you had compounded at that rate then you'd have
made 20%, so what if she made 10% in a month? Well the stock went from a buck a
share Jan 1 to a buck ten a share by Feb 1 .Well if you impute so that you can [calendar shown]
compute that month's gain of 10% would carry a compound rate of a hundred
twenty percent. Right ? You're multiplying 12 months times 10 there, that'd be
annualizing it meaning, that at that rate you are more than doubling your money on [spreadsheet shown]
an annualized return basis. And that's more than enough dough to keep
terminators closet popping out those Wi-Fi enabled contact lenses faster than [woman watches TV]
people can wear them.
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