TLDR
Net exercising (cashless exercise) is when you sell some of your shares in order to cover the cost of your option exercise
Net exercising is essentially a cashless exercise where you tally up the total net value of your stock options based on the number of vested shares multiplied by the spread between the current Fair Market Value (FMV) and your strike price(s). That total value is then divided by the current FMV to determine how many shares you get to keep. This total value is then taxable to you at ordinary income tax rates. Since your stock isn't actually liquid yet, the tax obligation from a cashless exercise can be quite burdensome.
Private companies rarely offer a cashless exercise feature because the stock options were meant to be a retention tool, but a cashless exercise makes it easy for employees to leave the company without abandoning their option grants. When they do offer it, it is usually available only after liquidity is available for the stock to address the associated taxes. In those situations, the formula above is multiplied by (1 - Tax Rate) to calculate the reduced number of shares you retain. If the feature isn’t explicitly listed as a feature of your option grant, then attempting to simulate it by selling shares and buying shares could cause double taxation. First you exercise the options which triggers taxes. Then you sell the shares which triggers more taxes. Whatever money is left can be used to exercise more shares that you keep. But that final exercise triggers taxes, too. This sequence of repeated taxation is usually a disaster. A much more efficient tax solution is available by obtaining non-recourse financing from the ESO Fund.
Frequently Asked Questions
What is a strike price?
The strike price or exercise price is how much an employee will pay to exercise one share of their company's stock.
What is fair market value (FMV) and why does it matter for stock options?
FMV is the company’s estimated stock value, affecting the tax treatment of your options.
Do I owe taxes when I sell my shares?
Yes, you will owe taxes when you sell based on your profits and how long you held the stock.
What does ESO Fund do?
ESO Fund helps startup employees exercise their stock options without risking their own cash. We provide non-recourse funding, covering 100% of the exercise cost and taxes, so employees can retain ownership and benefit from future upside. If the company doesn’t succeed, you owe us nothing—we take on all the risk.
How does ESO Fund differ from a cashless exercise?
A cashless exercise requires selling shares immediately, often at a low price, to cover costs—giving up future upside. ESO Fund covers your exercise cost without forcing a sale, so you keep your shares and potential gains, risk-free. If the company fails, you owe nothing.
