Cashless exercise of options
Cashless exercise of options

The following Share Incentives practice note provides comprehensive and up to date legal information covering:

  • Cashless exercise of options
  • What is a cashless exercise of options?
  • Why are cashless exercises used?
  • Advantages for the option holder
  • Advantages for the company
  • What are the issues to consider when looking to operate a cashless exercise facility?
  • Timing of the sale of the shares
  • Sufficient up-front cash consideration
  • Do the rules allow for it?
  • Do the constitutional documents allow for it?
  • More...

What is a cashless exercise of options?

The ‘cashless exercise’ of options or a 'cashless exercise facility' refers to the mechanism by which share options can be exercised on the basis of an undertaking by the option holder to pay the exercise price, and often also any tax and National Insurance contributions (NICs) payable on the exercise of the option, out of the proceeds of sale of the exercised shares. This can involve all the shares the subject to the option being sold or just the sale of enough shares to cover the cost of the exercise price and, where relevant, any tax and NICs payable.

In effect, a cashless exercise facility provides the option holder with a way of exercising an option without having to fund the exercise price themselves up-front.

Note that a cashless exercise is only usually possible in circumstances where enough shares are immediately sold after exercise (or sold within a period of approximately one week) to ensure that enough up-front cash is obtained from the sale of those (or other) shares to fund the aggregate exercise price.

Why are cashless exercises used?

If operated correctly, a cashless exercise can be advantageous to both the option holder and the company whose shares are being issued pursuant to the share option.

Advantages for the option holder

The main advantage for the option holder is that they do not have

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