A type of cashless exercise (of a warrant/ stock option) in which an employee (holder  of stock options/ warrants) can exercise without the need to use his/ her own money to buy the underlying stock. The broker will lend the warrant or option holder the money, purchase the stock for the holder, and immediately sell it, against a fee, while the holder will eventually attain a specific amount of cash, after deduction of taxes and broker’s fees.

For example, if a warrant holder has warrants that could sell at $500,000. Assuming the purchase price was $40,000, the taxable gain would be:

Taxable gains = 500,000 – 40,000

Taxable gains = 460,000

At a tax rate of 40%, taxes amount to $184,000 (i.e., 460,000 × 40%). The broker will sell a specific amount of underlying shares to pay the taxes and cover brokerage fees (usually range from 5% to 15% per share). Supposing brokerage fees stand at $25,000:

Cash payment to warrant holder = after-tax gains – brokerage fees

Cash payment to warrant holder = 276,000 – 25,000 = $251,000

This represents the amount that a warrant holder will receive from the cashless exercise for cash.