Options Trading Tutorial

what is the process between employee, employer, and stock broker in employee stock option exercise?

Can someone explain to me how this works? When an employee exercises stock options, does the employee 1) normally pay the exercise price to the broker, who then sends the net proceeds back to the employee? Or 2) does the employee pay the company, and the company lets the broker know, and then the broker pays the employee the net proceeds? If I sound confused, believe me I am. Could someone be kind enough to give me a step by step of exactly what happens in the process, and what transactions are occurring between employee, broker, and company? THANKS!!

Public Comments

1. The broker facilitates the sale. They may be paid a fee out of the proceeds (say $50). If the broker is paid a fee, they will issue a 1099-B and the sale must be reported on the schedule D. If the stock option is being handled as a same-day sale or a partial redemption (enough stock sold to pay the taxes), then the employer has to be involved because the money has to be shown on the W-2 and the taxes withheld must be sent to the IRS under the EIN of the employer. When I exercised stock and kept the stock, I wrote the check to buy the stock to the company I worked for.