Should we allow electronic option exercises?
Takeaway: Yes, allowing electronic option exercises through a cap table platform is now the industry standard; it is a more efficient, secure, and professional process that eliminates the administrative friction of paper checks and physical stock certificates.
In the past, exercising stock options was a cumbersome, paper-intensive process. An employee would have to physically sign an exercise agreement, mail a paper check to the company's office, and then wait for the company to issue and mail back a physical stock certificate. This process was slow, inefficient, and prone to error.
In the modern startup ecosystem, this entire workflow has been replaced by a simple, secure, and instantaneous digital process. For any company that uses a professional cap table management platform, enabling electronic option exercises is a standard feature and a major quality-of-life improvement for both your employees and your finance team.
The Old Way vs. The New Way
The difference between the manual and electronic process is stark:
Manual Process: Involves multiple steps, mailing physical documents, processing paper checks, and manually updating the cap table spreadsheet, a process that could take weeks.
Electronic Process: The entire transaction can be completed in a few minutes online.
How Electronic Exercise Works
Modern cap table platforms like Carta or Pulley have turned the option exercise into a seamless, automated workflow:
Employee Initiates: The employee logs into their personal portal on the platform, where they can see all of their vested and unvested options. They select the number of vested options they wish to exercise.
E-Signature: They review and electronically sign the formal Exercise Agreement directly on the platform.
Payment: The platform facilitates the payment of the total exercise price via an ACH or wire transfer directly from the employee's bank account to the company's bank account.
Tax Withholding (for NSOs): If it is a Non-qualified Stock Option (NSO), the platform will automatically calculate the required tax withholding on the "spread" and facilitate a second payment from the employee to cover this amount.
Automated Issuance and Update: Once the funds are received, the platform automatically issues a new electronic stock certificate to the employee and instantly updates the company's cap table to reflect the change in ownership.
The Overwhelming Benefits
Efficiency and Speed: Electronic exercises eliminate the administrative burden of handling paper documents and checks, freeing up valuable time for your finance and legal teams.
Accuracy and Compliance: The platform creates a perfect, time-stamped digital record of the entire transaction. This provides a clean, auditable trail for your records and eliminates the risk of manual data entry errors on the cap table.
A Professional Employee Experience: It provides a simple, modern, and transparent experience for your employees, reinforcing that you are a professional, tech-forward organization.
While there is a cost associated with using a cap table platform, the benefits in efficiency, compliance, and professionalism are overwhelming. In today's startup environment, allowing electronic option exercises is no longer a question of "if," but simply a core feature of a well-managed equity program.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.