Expansion happens as follows:
BACKGROUND/CONTEXT:
At the end of the playoffs (once all days are simmed), the commissioner has the option to press the "OffSeason" button; this ends the current season (simming games along a schedule) and shifts the game into Off-Season mode.
The first phase of the off-season allows for "league structure editing" - this is when the team editor allows for adding teams (expansion), removing teams (contraction), and/or moving teams (conference/division realignment). "Expansion" occurs if at least one new team is added via the Team Editor in this phase (teams must be added prior to running the draft lottery).
For the sake of this post, we will ignore what happens if there is contraction and/or realignment concurrent with expansion. This is only examining what expansion is and how it works.
WHAT HAPPENS NEXT:
There will be an "Expansion Draft" phase added between the draft lottery and the rookie draft (this allows the expansion team(s) to know when they will be picking and provides them with trading assets). The expansion draft is run as follows:
STEP ONE: BUILDING THE EXPANSION DRAFT ROSTER (PROTECTING/EXPOSING PLAYERS)
All non-expansion teams are required to place at least one player into the expansion draft pool. This is based on contracts for the upcoming season, not the just-finished season, meaning players whose contracts expired at the end of the previous year are Free Agents and not on the team's roster during the Expansion Draft. Players a team does not make eligible for the expansion draft are considered "protected" while players that a team makes eligible for the expansion draft are "exposed."
Each team may protect no more than eight players, and each team must expose a minimum of one player. However, no matter how many players a team exposes, each team can only "lose" one player to the expansion draft.
This means every team with 9 or fewer players must expose at least one player to the expansion draft. Even a team with only one player under contract would have to expose that one player. Teams with 10 players under contract must expose at least TWO players to the expansion draft, teams with 11 players under contract mut expose at least THREE, and so on.
Note: You do not have to protect eight players; for example a team with 10 players under contract might choose to expose five of those players to the expansion draft (this satisfies the rules of exposing a minimum of one player and protecting no more than eight players).
(In FBB, a "Draft" section appears at this time in the menu and each team must expose players using the "Protected List" button; this screen shows which players a team has exposed by highlighting them in blue - a team can un-expose a player by protecting him instead)
STEP TWO: THE EXPANSION DRAFT
Each expansion team receives 12 draft picks in the expansion draft. The picks are used to select players from the expansion draft pool.
When an exposed player is selected from the draft pool, the expansion team ALSO assumes the contract of that player in its current state, including Bird Rights, Option years, etc. It is the same as though the player had been traded directly to the expansion team for nothing in return.
When an exposed player is selected from the draft pool, all other players the team exposed immediately become protected. So if, for example, Team A exposed Player 1, Player 2, and Player 3 to the draft pool, as soon as Player 3 is selected, Player 1 and Player 2 are removed from the draft pool (and stay with Team A).
This also means if there are multiple expansion teams making picks in the same off-season, if expansion Team X selected Player 3, expansion team Y cannot later select Player 1 and Player 2 - Team A has already lost one player and cannot lose another player to expansion (this may result in gamesmanship among expansion teams).
STEP THREE: TRADES
It is usually considered "kosher" for teams to trade assets to expansion teams in exchange for the expansion team's promise to select (or not select) a particular player or players. For example, a team may send an expansion team points or a pick in exchange for the expansion team agreeing to take on a bad contract or in exchange for the expansion team agreeing not to select any of that team's exposed players. Sending points in "consideration" for promises to draft/not draft an asset is usually considered a legal trade since there are direct benefits for both teams (where a points-for-points trade means one team gets no benefit), even though our "normal" trade rules (here: viewtopic.php?p=120639&hilit=trading+rules#p120639) say "at least one pick or player must be involved."
Note in years where there are multiple expansion teams, an existing team might offer consideration (points or a pick) to incent the first expansion team picking to spend their initial selection on a particular exposed player to remove their other exposed players from the board and keep them away from other teams.
Note it is possible (though not advised) for an expansion team to draft players whose contracts immediately take them over the salary cap and possibly even put them into the luxury tax.
AFTER THE EXPANSION DRAFT:
After the draft, the off-season moves into the "Rookie Draft" phase; Expansion Teams will have (high) draft picks and participate in Free Agency like any other team.