The Definition of a Net Share Settlement

Normally exercising a stock option takes money. A net share settlement lets you buy the stock when you're short on cash. Instead of paying the company for a certain number of optioned shares, you get a smaller packet of stock, but no cash changes hands. This can work out well for both you and the company.

Suppose you have an option to buy 100 shares at $10 each -- a $1,000 purchase -- and when you exercise the option, the shares are worth $25. In a net share settlement, the company gives you 60 shares and hangs on to the rest. At $25 each, the 40 retained shares cover the cost of your purchase. If the company doesn't want to issue more stock, this works to the firm's advantage too. Instead of 100 added shares in circulation, it only has 60.