Cashless Exercises of Private Company Stock Options

[Guest smithee]

Can a privately-held company complete a cash-less exercise of stock options (completely cash-less, that is a same-day-sale" exercise where the employee who does not own any shares currently exercises the option then sells enough shares to pay for the entire exercise plus withholding) without using a broker and without violating securities laws? Can privately-held companies do cash-less exercises?

[Kirk Maldonado]

To whom is the employee going to sell the stock?

[Guest smithee]

He is going to sell the stock to the employer.

[Kirk Maldonado]

Then why would you use a broker?

[Guest smithee]

I don't think you are understanding my question. If a private company wants to permit its employees to exercise their options through a cashless, same-day-sale with the broker or employer is this permitted under the securities law? What are the permissible methods of payment by which an employee employed by a privately-held company may exercise his stock options?

[pjkoehler]

I think Kirk's basic point is that if the you identify the seller (employee) and the buyer (the employer) as the parties to the transaction, there is no role for a broker to play. Regulation T which permits a broker to advance an optionee the funds required to exercise is applicable only in the context of brokers engaging in transaction involving publicly traded securities. The conventional method by which private companies help optionees pay for option exercises is by issuing Tandem Stock Appreciation Rights (SARs). The SARs, which give the optionee the right to receive the appreciated value of the stock between the date of grant and the date of exercise, track the option spread. With Tandem SARs, an exercise of either a SAR or a stock option will decrease the number outstanding of the other. In effect, this is another version of a cashless exercise. There are special limitations that apply in the case the SARs are issued in tandem with ISOs. Public companies rarely use Tandem SARs because there is negative accounting treatment and because of the liberalization of Regulation T which facilitate the cashless exercise.

[Kirk Maldonado]

I agree with everything that PJK stated.

Also, as a practical matter, I don't think that you will be able to get a broker involved if the stock is not publicly traded.