Understanding Net Exercise (Cashless Exercise) – altshare

Overview

"Net Exercise" is a method of converting your vested options into shares without requiring an out-of-pocket payment for the exercise price. Instead of paying for the shares, a portion of the shares you would have received is withheld to cover the cost of the exercise.

How it Works

In a standard exercise, you must pay the "Exercise Price" for every option you convert. In a Net Exercise:

The system calculates the total cost of exercising your options.
It then determines how many shares are needed to cover that cost based on the current market value.
Those shares are "subtracted" from your total, and you receive the remaining "Net" shares.

Benefits:

No Cash Required: You don’t need to transfer funds to the company to exercise your options.
Lower Dilution: Fewer shares are actually issued, which is often preferred by companies and shareholders.

Calculation Example

Imagine you have 1,000 vested options with the following details:

Exercise Price: $5 per share
Current Market Value: $10 per share

The Calculation:

Total Value of Shares: 1,000 units × $10 = $10,000
Total Cost to Exercise: 1,000 units × $5 = $5,000
Shares Withheld for Cost: $5,000 (cost) ÷ $10 (market value) = 500 shares.
Final Result: You receive 500 shares (1,000 total - 500 withheld) at no personal cost.

Important Tax Considerations

Tax Event: In most cases, the tax event occurs at the time of exercise or when the shares are sold by the trustee.
Tax Rate: If the 24-month holding period (under Section 102) has not been completed, the profit may be taxed as ordinary income rather than capital gains.
Valuation: For private companies, the share value is determined by an external valuation expert (409A).

Is Net Exercise Available to Me?

Net Exercise is primarily relevant for employees of public companies or specific private companies that have approved this mechanism in their equity plan. You can check if this option is available to you under the "Create New Instruction" menu in the portal.

Need further clarification? Our support team is available via Live Chat on the portal or you can simply reply to any email you’ve received from us for assistance.