What’s a cashless exercise?

Fast-forward five years. You can finally exercise (purchase) your share options. Except there’s a problem - you don’t have the cash. 

The cost to exercise can be steep. It’s one of the few drawbacks of getting share options over ordinary shares.

But if your employer designs an exit-only scheme, you may not need to cough up any cash at all…

The exercise price

To get your hands on your vested options once and for all, you need to pay the exercise price or 'strike price'. 

This is a cost, per share, determined by your employer when they designed the scheme. And it’s based on the value of the company at that time.

When the big day arrives, instead of paying the current share price, you pay the price set when you first accepted the option agreement. 

So in a best-case scenario, you get a great deal. 

On the flip side, if the company doesn’t do so well and there’s no real financial gain for you, there’s no obligation to exercise your options. 

Put off by the cost

Now, here’s the rub.

Suppose your employer offered you 10,000 options with an exercise price of £1.00 per share. That’s still £10,000 to fork out upfront. No small change in a cost-of-living crisis.

Today, Gen X, Millennials and Gen Z make up the majority of the workforce. Now, look at the average savings among them: 

• Gen X: £12,939
• Millennials: £5,943.
• Gen Z: £2,463.

You can see why the cost to exercise could be too high, and why some people are put off entirely - even if the gains are great.

No cash? No problem.

Under an exit-only scheme, your vested options can only be exercised when the business goes through an exit event, i.e. a sale, merger, management buyout, company buyback or IPO. 

Vestd agreements allow for what’s known as a ‘cashless’ exercise for exit-based schemes - so instead of paying the cost to exercise upfront, the cost is deducted from the total profit when sold.

In other words, you don’t have to cough up the cash, it’s just taken off the total profit!

So, before you sign an option agreement, look for a clause allowing for a cashless exercise. (Again, this is just for exit-only schemes). 

Or point your employer in our direction so they can take advantage of our best-in-class agreements.

Vestd makes setting up, designing and managing Enterprise Management Incentives, Company Share Option Plans and unapproved option schemes, a piece of cake.

One more thing…

Time it right

Time is of the essence in some cases. We won’t go into too much detail here as we’re not focusing on one particular option scheme - but just so you’re aware - some have strict exercise windows.

And if you exercise your options outside of those windows, they may lose their tax advantages, or worse, lapse altogether.

Here are two examples:

• EMI options need to be exercised within ten years of their grant.
• For CSOP options, the tax benefits kick in after three years from the grant date and have a shelf life of 10 years.*

*The CSOP can continue after 10 years if it’s an exit-only scheme, but the tax benefits will expire. Learn more about the specific rules for EMIs and CSOPs.

Hopefully, you now have a better idea of cashless exercises and exit-only schemes.

By the way, we offer free consultations for anybody thinking of setting up a company share scheme. Point your boss in our direction - we're always happy to help.