What is a Stock Swap? Should I Consider Doing One if My Company Allows It?

A stock swap allows employees to use company stock they already own to pay for the exercise of stock options in lieu of paying cash (e.g. its simply an alternate way to pay for the exercise of your options). Its most commonly available for publicly traded companies, but may be available in select scenarios for pre-IPO companies as well.

In our experience, the strategy is only applicable to consider in the event that your company (1) does not offer cashless exercise or shares, but (2) does allow for stock swaps. As most publicly traded companies have a cashless exercise plan in place for employees, we've found that the use of stock swaps is rare (because its more complex to implement, and has more complex tax dynamics, than simply using a cashless exercise for a portion of the transaction)

Stock Swap Example

• XYZ Corp is currently trading at $50 per share

• An employee has 10,000 shares of company stock purchased at $2 per share

• They also have 5,000 NSO option with a $20 exercise price

• To do a stock swap exercise, they swap 1,000 of their existing shares to "pay" the $100,000 exercise cost of the NSO option (5,000 shares at $20 per share strike price)

• The stock swap allowed them to exercise the 5,000 options by paying with shares of stock instead of cash

• After the transaction, they have 14,000 shares (10,000 starting shares, less 1,000 swapped shares, plus 5,000 shares via the NSO exercise)

• Note: the tax treatment on these 14,000 owned shares is a bit unique:

  • 9,000 shares at $2 per share tax basis (stock they owned and did not swap)

  • 1,000 shares at $2 per share tax basis (swapped stock retains its basis)

  • 4,000 shares at $50 per share tax basis (remaining options exercised in the stock swap after deducting the swapped shares that retain their tax basis)

  • The individual would also have recognized $150,000 of income on the bargain element of the NSO upon exercise [5,000 options with a $30 bargain element ($50 price less $20 strike)]