I've got a client with about 11,000 stock options in Southern Co (SO). The grant prices vary, but it will cost him $200,000 to exercise the options (which he doesn't have in cash). Once purchased, the shares can be redeemed for about $425K. That's a $225K gain before taxes. This is a Non-Qual grant, not an ISO.
This is my understanding. Please correct if necessary. If he does a cashless "exercise and sell" transaction, he will buy and immediately sell all 11,000 shares and the $225K profit will be taxed as ordinary income. But he will have the remaining cash in his pocket.
If he does a cashless "exercise and sell to cover" he will buy all 11,000 shares and only sell enough to pay the $200K it cost him to buy. The $225k gain will be left in stock certs for 13 months and then liquidated. This will cause the $225K gain to be taxed at Capital Gains rates. The downside is that he is subject to the stock volatility for 13 months AND he doesn't have the cash in hand.
We are leaning towards option 2, but I want to make sure I have the taxes correct.