What happens to stock options when a startup is acquired?
The treatment of stock options during an acquisition depends on your option grant agreement, the acquisition deal structure, and whether your shares are vested or exercised. Exercised Shares: Generally, exercised shares are either paid out in cash or converted into common stock shares in the acquiring company.
In a stock-for-stock acquisition, the acquiring company could also assume the value of your vested options or substitute them with their own stock. Substitution is more common as the acquirer will only assume equity compensation if they plan to keep the target company as its own independent business.
If the startup doesn't do well, or if it is sold before the options can be exercised, then the employee walks away with nothing. On the upside, if the startup does well, those employees who know how to exercise their options can gain significant financial returns from their investment into the company.
In an all-stock acquisition, shareholders of the target company will have their shares converted into shares of the acquiring company based on a specified conversion ratio.
In many cases it can be advantageous to exercise your stock options early (provided you have the cash, and assuming you believe in the company given you accepted a job there). The first benefit of exercising early is that you will likely have zero (or very little) tax liability at the time of exercise.
If a sale ultimately takes place, in most cases, the ESOP will be terminated. However, before the ESOP can be completely terminated, all participants – including those who are no longer employees of the company – will need to be paid.
Q: What happens to my already exercised stock options when a company goes private? A: Options may be cashed out, converted to private shares, or even cancelled depending on the deal terms and your option status. Consulting your company's equity plan and seeking professional advice is crucial.
Often, the stock price will rise dramatically when it's acquired for a significant premium. As a result, investors may sell the stock after the merger. However, it's important to determine whether the company's fundamentals are better after the merger or acquisition. If not, it may be time to sell.
A Shareholder cannot generally be forced to sell shares in a company unless you have either agreed to a process resulting in that outcome, or the court orders that outcome.
Stock options give employees a share in the potential upside of the company's success. They are high-risk, high-reward compensation. You don't know how much they will be worth when they're first issued. But if the company does well, employees with large option grants stand to gain significantly.
When not to exercise stock options?
If your company is private and isn't likely to offer any tender offers or IPO soon, exercising your options is inherently risky—you're paying cash for shares that may never become liquid.
It's often wrong to exercise an option rather than sell it unless you want to own a position in the underlying stock. Be sure to close it through an offsetting sale if the contract is in the money heading into the expiration and you don't want it exercised.
Your stock option grant should also specify its expiration date. In general, ISOs expire 10 years from the date you're granted them. However, your option grant can also expire after you leave the company—you may only have a short window of time to exercise your stock options (buy the shares) after you leave.
If a startup never goes public what happens to the stock options that employees have? Nothing in particular happens to employee stock options if the issuer fails to go public, they simply persist as stock options according to the terms of the option plan and option grant.
If you took advantage of an early-exercise policy and exercised options before they vested, your company has the option to repurchase any exercised-but-unvested shares when you leave.
After the deal closure, shareholders typically receive cash for their existing shares, leading to the delisting of the public company's stock. Conversely, when a public firm acquires a private company, its share price may decline due to the same reasons and to reflect the cost of the deal.
Yes, you can sell your pre-IPO stock options. A number of web-based companies, such as EquityZen and Forge, connect sellers of, and investors in, pre-IPO shares, while some plans may allow for the sale of pre-IPO shares to a third party.
If you have vested RSUs, those can be converted into shares of the acquiring company, or you may receive a cash payout that's based on the market value of the acquiring company's stock at the time. The terms will vary depending on the transaction agreement.
Vested employee stock options contain guarantees so employees with vested options will have some options when a company is acquired. The acquiring company might buy out the options for cash. They may also offer to replace those contracts with options for the acquirer of equal or greater value.
How to Cash Out of an ESOP. Being vested doesn't necessarily mean you can cash out of your ESOP. Generally, it's only possible to redeem these shares if you terminate employment, retire, die, or become disabled. Some ESOPs may distribute dividend payments to employees who are still at the company.
Can a company keep your ESOP?
In most circumstances, the vesting period can run up to four years. The ESOPs are forfeited if an employee departs or is fired before the vesting period. ESOPs are a tax-advantaged liquidity option that gives fair value to shareholders.
This means you take over all contracts that were signed on behalf of the company, as well as all the debts and obligations that existed at the time of sale. For example, if the company signed an agreement to manufacture 50 chairs, you will have to fulfill this agreement.
Prior to getting into your post-termination exercise periods, you should know that when you leave the company for any reason, unvested options remain unvested in many cases. Practically speaking, this means that the in-the-money value of unvested employee stock options is forfeited.
Stock options at private companies are often issued with a low strike price. This allows you a chance to buy shares for a low cost, which requires less cash up front. This is a good thing when you consider how your cash flow will be impacted by an exercise – but this is only one thing to consider.
With an all-stock merger, the number of shares covered by a call option is changed to adjust for the value of the buyout. The options on the bought-out company will change to options on the buyer stock at the same strike price, but for a different number of shares.
