You’ve heard the rumors; your company is being acquired. You have stock options and wonder what happens to them when a company is acquired.
It’s an important question and one that often goes unanswered until the dust has settled. That’s why we’re here to help, so you can be informed before anything gets put in motion. The answer might not be what you expect; let’s unravel the mysteries of stock options when a company is acquired.
We’ll cover who keeps their options, gets paid, and walks away empty-handed. We’ll also dive into the legalities of it all—so you can rest assured that you know what you’re signing up for if and when the time comes. Let’s find out more together.
What Are Stock Options?
If you’ve ever heard of stock options, you may not know exactly what they are. So let’s start there. Stock options offer the holder (usually employees) the option to buy a certain number of shares of stock at a set price – known as the strike price – for a set period of time. Companies typically award them to executives or as part of company-wide employee benefits packages.
Understanding stock options is the first step in figuring out what happens to them when a company is acquired. The details depend on whether or not the acquiring company honors existing stock options, and if they do, how long they are honoring them for and at what price.
It’s important to know that if an acquisition doesn’t involve cash changing hands between companies, any existing stock options will immediately become worthless when the transaction closes – even if it seems beneficial for staff.
What Happens to Stock Options When a Company Is Acquired?
When a company is acquired, it’s only natural to have questions about your stock options. After all, it’s a big life change for everyone involved! To help make sense of it all, let’s break down the three potential outcomes for stock options when a company is acquired:
- Merger Exercise: In this case, you can exercise your options and buy shares at the lower exercise price before the merger occurs. It’s important to remember that you must have vested stock to do this.
- Tender Offer: Some companies go a step further and offer employees cash for their vested shares at a certain price before the merger takes place—a tender offer.
- Exchange Offer: The last option is an exchange offer where employees exchange existing stock options for new ones with the acquiring company.
No matter what happens, we recommend that you speak with your legal or financial advisor before taking action—only they will know what choices suit you and your situation best!
What Happens to Employer-Granted Stock Options?
You may wonder what happens to employer-granted stock options when a company is acquired. Companies that offer employee stock options often include clauses in their option plans that account for such events. Generally, the outcomes vary depending on the specifics of the acquisition. Here are a few common scenarios:
Merger or Consolidation
Typically a company may convert options to the acquiring company’s stock, often at a predetermined rate, with the same vesting schedule in place and expiration date.
Sale of Assets
If your company is sold as part of an asset sale, your options may become vested options and exercisable upon closing. This generally depends on whether there is any continuation of the existing business after closing. The amount you receive will likely depend on what assets you had or were given when you joined the company.
Buyout Offer
In case of a buyout offer, your options may become fully vested and exercisable immediately upon signing the merger agreement. Still, again this depends on if there will be any continuation of your company after the completion of the transaction and the terms of the deal. In some cases, employers have been known to cancel all unexercised stock options upon closing a buyout offer.
Knowing what happens to employer-granted stock options is important as it can help you decide how to manage your finances about such events and best prepare for them.
Different Outcomes for Employee-Exercised Stock Options
If you’re an employee with stock options, you may have heard that the outcome of your options and shares can differ when a company is acquired. It all depends on when you exercised your stock options and the specifics of the acquisition.
Pre-Acquisition Exercise
Suppose you exercised your stock options before the acquisition took place, generally speaking. In that case, you’re in luck because the original exercise price for your options will often be honored. Plus, depending on the terms of the acquisition or merger agreement, you might be able to get even more money from those same shares.
Post-Acquisition Exercise
It’s not unheard of for acquisitions to provide some payout for employees who have already exercised their stock options—but it’s not guaranteed either. And if no payouts are offered, any ongoing incentives (like restricted stock units) or vesting awards might kick in as usual — or get canceled entirely.
It depends on what specific agreements were made between the companies, and if those are favorable towards employees with vested stock options — then great! If not, employees might have to take what they can get.
Acquisition Factors
When a company is acquired, the fate of stock options and those with them depends on a few factors. Let’s take a look at what they are.
Deal Structure
The first factor is how the deal is structured. Suppose the acquiring company is paying for the acquisition with stock. In that case, stock options are usually converted into the acquiring company’s options – but only if the option holder works for the surviving entity after the merger.
Termination Provisions
The other factor is any termination provisions that may exist in an option holder’s agreement or plan document, which may provide for accelerated vesting upon acquisition or change of control or different classes of treatment based on particular titles or duties held by executives during an acquisition. It all gets complicated, so read up on your rights and take advice, if necessary, before signing anything.
In some cases, such as when a public company acquires another public company through all cash, cash, and stock, or all-stock deal structure – and especially when significant payments are involved – it pays to ensure that stock option holders are treated fairly in the acquisition process. Stock options can be worth a lot to their holders, so it’s wise to know your rights before you sign anything that may affect them.
Vested Stock Options
If you have vested stock options, you’re probably wondering what happens to them during a company acquisition. Unfortunately, there’s no single answer, as it depends on the sale terms.
When a company is acquired, the former employees’ stock options may be converted into different forms of compensation based on the decisions of the new owner. In some cases, employees may be able to cash out their vested stock options for their predetermined exercise price; in other cases, they might be offered alternative forms of compensation, such as new incentive plans or restricted stock units (RSUs).
It all comes down to what the new owner offers and what you agree to accept. The good news is that since equity compensation is valuable and coveted by many, you can use it as a bargaining chip when negotiating other aspects of your job offer.
Unvested Stock Options
When a company is acquired, you may have many questions about what happens to unvested stock options. Knowing the details helps you plan your financial future, so let’s explore it.
Vesting
First, unvested stock options are for the vested employee who has reached the timeline stated in their stock option agreement. If an acquisition occurs before an employee reaches the vesting timeline, their unvested stock options will be treated as if they’d been exercised. After the merger, employees receive a new form of compensation in exchange for their vested and unvested options – usually equity or cash from the new parent company.
Exchanging Options
Alternatively, some employees may exchange their unvested stock options for new ones issued by the acquirer—typically at a higher value than before. This is known as exchanging options, and it can be very beneficial to the employee-shareholder. In general, exercise prices of acquired companies’ option grants can be higher than those given out by either company beforehand. If this interests you, be sure to check how much each share would cost if you were to exercise them immediately!
So that’s what happens to your stock options when your company is acquired—you either receive compensation in exchange for them or can use them to purchase additional shares at a higher value with exchanged options. It’s up to you which is right for your situation, but understanding these details can help you decide how best to proceed!
When a company is acquired, what happens to your stock options depends on whether or not you’ve exercised them.
Exercised Shares
You’ll be treated like a regular shareholder if you’ve already exercised your shares. That means that in most cases, when the company is acquired, you’ll receive one lump sum payment representing the company’s stock price at the time of the sale.
The downside is that this payment tends to be taxable, so it may cost you more than expected. You also have no choice over the payment type; it will be cash or stock in the acquiring company (or some combination of both).
Unexercised Shares
If your shares are still unexercised at the time of the sale, it can get a little more complicated. In almost all situations, you will lose your right to buy the shares for their original exercise price. But depending on how the acquisition is structured and how generous the acquiring company is, they may give those with unexercised options something in return – generally either cash or stock in the company being acquired.
How Can Employees Protect Their Stock Options?
When acquiring a company, employees’ biggest questions is what happens to their stock options. The short answer is that it depends on the type of stock option and the acquiring company.
Incentive Stock Options
Incentive Stock Options (ISOs) typically become Non-Qualified Stock Options (NSOs) when a company is acquired. As an employee, you can protect your NSOs through various methods, including a “Change in Control Agreement” (CICA). A CICA allows you to negotiate with the acquiring company for cash or additional equity when your existing options are converted into NSOs.
Non-Qualified Stock Options
If you have NSOs before an acquisition, these will often be converted into new options granted by the acquiring company. However, depending upon the terms of the acquisition, employees may receive cash or additional equity as consideration for their options being converted.
No matter what kind of stock options you have—ISOs or NSOs—one option for protecting them is to exercise them before an acquisition is finalized. That way, you still own them and can get something for them before they are converted into new stocks or are made void due to the sale. It’s important to note that exercising ISOs will require taxes upfront, so consult with a professional or financial advisor before proceeding with this strategy.
Tax Implications of Acquired Stock Options
When a company is acquired, the tax implications for employees with stock options can be a bit complicated. Understanding how this impacts your financial situation is important before deciding what to do.
Here are some things you should know:
Capital Gains Tax
You may have to pay capital gains taxes on any gains you have made with your stock options. The amount of tax owed will vary depending on how long you have owned those stocks. Generally speaking, a lower tax rate will apply if you’ve held onto those stocks for more than a year before the acquisition.
Exercising Your Options Early
If there is an offer for employees to exercise their options early, it may be advantageous to do so to avoid paying those capital gains taxes. However, this isn’t always the case—there may be other factors, such as financial and personal, that should be considered.
Learn how to do a cashless stock option exercise here.
Consulting An Expert
It’s always best to consult an expert before deciding what should happen with acquired stock options, as tax implications can vary greatly depending on many factors. An accountant or financial advisor can help you make the best decision for your individual situation and ensure that complex paperwork is filled out correctly and efficiently.
Strategies to Maximize Value of Stock Options After Acquisition
It’s possible to get the most out of stock options when a company is acquired. Here are three strategies to maximize the value of your stock options after a company is acquired.
Review the contract and look for the vesting acceleration clause
Any existing contracts related to the stock options should be reviewed. Many contracts contain a vesting acceleration clause, which allows an option holder to accelerate vesting so they can exercise their shares before the acquisition date. This is also known as “cashless exercise.”
Place an option spread
You can also try placing an option spread which may help generate some income from your stock options. An option spread involves buying and simultaneously selling call options on the same security with different strike prices and expiration dates.
Exercise your in-the-money options
Finally, you can also exercise any in-the-money options and create cash or buy additional shares before the acquisition occurs. This strategy will depend on your tax situation, so consult a financial planner or accountant before making any decisions.
What is a Company Merger?
Have you ever wondered what a company merger is? A company merger happens when two companies join forces and become one entity. They share assets, technology, resources, and in some cases, even stock options. So how does this affect you as an employee? Well, when a company merges with another or is acquired by another, the fate of your stock options lies with the terms of the agreement between the two parties.
When a merger happens, there are three possible outcomes for your stock options:
- Your stock options could remain unchanged—you keep the same benefits that you had before the merger.
- Your employer could exchange your stock options for shares of stock in the newly merged company or even cash out entirely.
- Your employer could terminate your existing stock option plan altogether.
The answer to this question will depend on the terms outlined in both companies’ option plans and respective corporate charters—so double-check these documents before signing anything! Ultimately, understanding a company merger and what it means for your current or future stock options is an important part of ensuring you are properly informed when making decisions about your finances in the future.
What Happens to Your Stock When a Company is Sold?
When another company acquires a private company or startup through a merger or acquisition (M&A) deal, the treatment of stock options and other types of equity depends on the terms of the sale. The acquiring company may choose to buy the company’s stock at the current market price per share, which can benefit shareholders if the market value of the company’s stock is higher than the price per share offered by the acquiring company.
For mergers and acquisitions, the treatment of stock options and other equity will depend on whether they are vested or unvested. Vested options or restricted stock awards (RSUs) will typically be converted into the acquiring company’s stock or cash at a predetermined price per share. Unvested options or RSUs may be accelerated and fully vested in the event of the sale or forfeited altogether.
Employees with Stock Options
Employees who hold stock options in the event of a company’s sale may choose to exercise their options before the sale if the market price per share is higher than the options contract price. If the acquiring company buys the company’s stock at a higher price per share than the options contract price, employees can benefit from the price difference. However, if the acquiring company buys the company’s stock at a lower price per share than the options contract price, employees may experience a loss.
Overall, the treatment of stock options and other types of equity in the sale of a company depends on the specific terms of the M&A deal and the acquiring company’s plans for the new company. Shareholders should carefully consider the potential impact of the sale on their investment and review the details of the stock plan to understand their options in the event of a sale.
FAQ
You might wonder what happens with stock options when a company is acquired. Here are some of the most common questions about stock options when a company is sold.
What Happens to Employee Stock Options When a Company Is Bought?
Stock options are typically treated as part of the sale of the company. This means that in most cases, you can convert your employee stock options into cash or equity in the company buying your former employer.
Can I Keep My Employee Stock Options After an Acquisition?
In some cases, you may be able to keep your employee stock options after an acquisition. This typically depends on the type and value of your stock options and how they were structured before the sale. If you can keep your stock options after the sale, you will likely be subject to new vesting periods and restrictions set by the acquiring company.
What Is Cashless Exercise?
Cashless exercise is one option for cashing out employee shares when a company is sold. In this case, you will not have to pay out of pocket for taxes associated with selling shares, as these costs can be deducted from the amount owed to you for any shares you decide to sell over time. Your former employer’s broker can help with cashless exercise transactions so that you understand all associated costs and requirements before deciding to cash out shares.
Conclusion
Understanding what’s happening with your stock options when a company is acquired is essential. Every situation is unique, so make sure you understand the nuances of the acquisition and talk to the right people to ensure your rights are protected.
Ultimately, it can be confusing and uncertain when a company is acquired—and stock options are no exception. Keep up-to-date on the acquiring company’s policies, speak with their management, and get legal advice if necessary. This way, you’ll be better prepared for whatever happens to your stock options when a company is acquired.