In other words, insiders who get options for free can convert them to shares without paying any cash at all. All they have to do is surrender portion of the options (which could be effectively worthless) in order to get a lesser number of shares for free. The company gets no cash which would normally be due when options are exercised in the usual way.

The advantage to the insider who has the options is that he can get shares to sell for free even if the shares are trading below the exercise price.

I never knew that was legal or possible, but I guess it must be...