Carta Collective

Hello -

Looking to see if anyone has had success with setting up a "sell to cover" type arrangement for their employees in a private company.  The idea here is that company would buyback options in order to allow employees to exercise/purchase there shares without outlaying cash.  For simplicities sake, I would assume the employee has to pay and manage their own taxes - this would be a net $0 cash transaction between company and employee.  I know this is very common with public companies with the public market, but trying to figure out if anything similar could be implemented at a private venture backed company.  

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Melissa
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Hi Melissa! It may be helpful to take a look at our Net Exercise support article. Not sure if that exactly accomplishes what you're hoping, but it may be a good place to start. @Christopher Hoffmann, any other ideas on this one? 

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Brent Devey
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Original Message:
Sent: 04-11-2024 10:34
From: Melissa Ordway
Subject: Private Company Sell to Cover Options

Hello -

Looking to see if anyone has had success with setting up a "sell to cover" type arrangement for their employees in a private company.  The idea here is that company would buyback options in order to allow employees to exercise/purchase there shares without outlaying cash.  For simplicities sake, I would assume the employee has to pay and manage their own taxes - this would be a net $0 cash transaction between company and employee.  I know this is very common with public companies with the public market, but trying to figure out if anything similar could be implemented at a private venture backed company.  

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Melissa
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Hey @Melissa Ordway, it's a great question! First, I'd say to check to make sure it's allowed in your equity incentive plan (you may or may not find the language in the equity plan documents). You may also want to speak to your legal counsel about this.

Oftentimes in a 'cashless' or 'net exercise',  the vested options that are withheld may cover the exercise cost plus the applicable taxes, and the company then remits the taxes to the IRS on behalf of the employee. In this case, it's critical to assess the cash holdings and liquidity of the company to ensure they can always pay the taxes on behalf of employees who exercise. (It's similar to companies who offer 'net settlements'  on their single trigger RSUs.) Truthfully I'm not sure if you can set up cashless exercises where the employee is responsible for their own taxes.

Another thing to think about is if your option grants are ISO vs. NSO. ISOs are typically not taxable at exercise, but a cashless exercise may qualify as a 'sale' of those vested/withheld shares, and may disqualify the benefits of the ISO grant. My first word of advice is to ask your legal counsel if this is allowed in your plan and if it makes sense for your company specifically.

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Chris Hoffmann
Founder, Equity Admin Co. - Carta admin for pre-IPO companies
https://www.equityadmin.co/
801.420.0441
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Original Message:
Sent: 04-11-2024 10:34
From: Melissa Ordway
Subject: Private Company Sell to Cover Options

Hello -

Looking to see if anyone has had success with setting up a "sell to cover" type arrangement for their employees in a private company.  The idea here is that company would buyback options in order to allow employees to exercise/purchase there shares without outlaying cash.  For simplicities sake, I would assume the employee has to pay and manage their own taxes - this would be a net $0 cash transaction between company and employee.  I know this is very common with public companies with the public market, but trying to figure out if anything similar could be implemented at a private venture backed company.  

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Melissa
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