Should we allow electronic option exercises?

Takeaway: Generally, my recommendation on this is no. The reason is that the vast majority of companies rarely have people exercise options so it just doesn’t come up that often and notification of exercises can become siloed if done electronically, which means the cap table is changing and we don’t know about it. Also, if you do allow this, you’ll need to remember to turn it off when you’re fundraising, which people sometimes forget and then it is a process to unwind option exercises.

In the modern world of technology, many startups are moving towards electronic stock option exercises. This process allows employees to exercise their stock options electronically (e.g., on Carta), without the need for physical paperwork. While electronic exercises can be more efficient and convenient for employees, startups should carefully consider whether they should allow this option.

One benefit of electronic exercises is that they can save time and money. Employees can complete the exercise process from their computer or mobile device, without needing to print and sign physical documents. This can reduce the headache of signing documents and paying by check/wire and can speed up the exercise process.

However, there are also potential downsides to allowing electronic exercises. I typically discourage startups from permitting electronic option exercises for a couple reasons:

There are times when startups cannot permit option exercises (e.g., during a financing). Of course, startups can and do turn off electronic option exercises during these periods but, in my experience, people often forget to do this and employees exercise options during those periods more than you would think. When this happens, we have to unwind the exercise, which can slow down the transaction (e.g., financing).

With electronic exercises, employees can exercise options without broad visibility by the company’s lawyers (and sometimes management) that the cap table is changing. This can result in misalignment on things like how many shares are outstanding and how many shares are available for issuance in the equity incentive plan. These are typically fixable issues but can cause confusion and require time to fix.

Ultimately, employees don’t exercise options often because they tend to only do so when they leave the company and startups don’t have that many employees who leave and want to pay out of pocket to exercise their option. My perspective is that, at least until capitalization management platforms really nail electronic option exercises, startups should not permit electronic exercises and should involve their lawyers in manually processing them.

Overall, whether startups should allow electronic stock option exercises depends on their individual circumstances and priorities. Startups should weigh the potential benefits of efficiency and cost savings against the potential risks of security and administrative burdens. In some cases, it may make sense to allow electronic exercises, while in others, it may be better to stick with traditional paper exercises.