Cashless Exercise
Exercising options without paying cash upfront by simultaneously selling enough shares to cover costs.
Definition
A cashless exercise (also called a same-day sale or net exercise) allows you to exercise stock options without paying the strike price out of pocket. In a same-day sale, a broker sells enough shares immediately to cover the exercise cost and taxes. In a net exercise, the company withholds shares equal to the strike price and delivers only the net profit shares. Cashless exercise is only possible at public companies or in secondary sale contexts.
Why it matters
Cashless exercise eliminates the need to spend your own money to exercise options. This is a huge relief for employees at companies that go public, as exercising can otherwise require tens or hundreds of thousands of dollars out of pocket.
Example
You have 10,000 options at a $5 strike. The stock is at $25. In a cashless exercise, you exercise all 10,000 and simultaneously sell 2,000 shares ($50K) to cover the $50K strike price. You keep 8,000 shares worth $200K (before taxes on the $200K spread).