When public markets turn volatile, corporations and investors will look to take advantage of depressed valuations by making acquisitions. If you’re an employee at a company that is purchased, you could receive a cash payout or new shares from the company making the acquisition. What happens to your stock during an acquisition depends on the type of equity you received, the length of time you’ve been at the company, and the terms of the deal your company agreed to with the buyer.
Here’s everything you need to know about your stock if your company gets purchased.
Acquisition factors that may impact your stock
A variety of factors can impact your equity, including terms that are listed in your individual grant or security and terms that get negotiated as part of the acquisition. Those terms can impact:
Most of the time, your exercised shares get paid out in cash or converted into common shares of the acquiring company. You may also get the chance to exercise shares during or shortly after the deal closes.
Sometimes a deal might state that any vested options are cashed out net of the strike price, which could mean your gain is small if the acquisition price is close to the exercise price in your grant. Either way, this effectively turns your vested options into a bonus, which can have tax implications. Acquisitions can also involve acceleration clauses, which speed up your vesting schedule.
Often, companies have entire troughs of shares dedicated to creating new option grants for employees at acquired companies, similar to new-hire option pools. A few things can happen to your unvested options, depending on the negotiations:
- You may be issued a new grant with a new schedule for this amount or more in the new company’s shares.
- They could be converted to cash and paid out over time.
- They could be canceled.
You may also have to reach certain milestones—generally time spent at the new company—before the acquirer gives you cash or stock for your prior shares. This helps the acquiring company retain talent and align employees with its goals. For any new options or bonuses you receive, you will likely get a fresh vesting schedule or one that matches your old grant.
A portion of the cash or stock you get for common shares and vested options may be held temporarily in a separate escrow account once a deal closes. This is meant to cover any outstanding issues (like taxes or lawsuits) post-closing. It may take some time to get this amount back, even up to a year or more.
This means part of your vested value is temporarily retained by the acquiring company, though this is usually just for founders or executives. Holdbacks often have their own vesting schedules and specific terms that incentivize the founder to stay on at the new company for a certain amount of time.
If you’re a senior employee, executive, or founder, you may receive different terms and potential deal-closing bonuses.
- Single trigger: This usually means all your stock vests upon change of control (basically an acquisition or IPO) at the company.
- Double trigger: This would mean all your stock vests after change of control and you’re terminated from the new company.
The terms of the acquisition deal, your option grant, and your company’s previous funding rounds will determine how an acquisition impacts you. The net result can depend on your company’s latest valuation, preferred rights for investor shares, your unvested vs. vested shares, accelerations, and more.
Details about an acquisition are discussed between the two parties and their CEOs, boards, corporate development teams, and lawyers, as well as the bankers who facilitate the deal. Here are the most common scenarios for what can happen to equity based on the type of acquisition:
|Scenario||What it means||Tax implications*|
|Acquired for cash: An acquiring company buys the acquiree for cash and pays out money to each security holder based on an agreed-upon valuation.||You usually get money only for outstanding shares and vested options.||Likely|
|Acquired for stock: The stock of an acquired company is effectively traded in for stock in the acquiring company at an agreed upon ratio.||It depends if the acquiring company is public or private. Exercised and vested shares usually are paid out.||Private company: Taxes depend on the type of shares and options (ISOs, NSOs, or RSUs). Public company: Stock may or may not be taxable based on the structure of the deal.|
|Acquired for both stock & cash: A portion of equity stakes are cashed out, and the remainder turns into stocks or options.||You and most other employees will likely get offered the same ratio of shares and cash.||Depends on how much cash and what type of option grants you receive.|
|Acquired for lower than previous valuation: This might happen when an acquired company has a lot of outstanding debt and/or fails to live up to its valuation.||Depending on your strike price, and investor liquidity preferences, this could mean your stock becomes worth nothing.||If your stock is worth nothing, you may be able to write off stock losses on your taxes.|
*You should inquire about the detailed transaction structure and potentially get some professional tax help.
What to look for when you get issued equity
When a startup or public company gets acquired, employees with stocks, options, or grants expect to reap the financial benefits. But there have been a number of M&A deals where the employees received much less than they expected. It’s important to be aware of the equity implications of any potential exit. The best time for insight often comes when you join a company.
When reviewing you job offer, here are some issues to consider:
- Liquidation preference: Whenever you’re weighing an offer from a company, ask about liquidation preferences—these determine“who gets how much” in the event of a merger or acquisition. (If a company IPOs, preferred stock usually converts into common stock.) Even if you’re already at a company, it’s worth asking about what can happen. Smart companies know that employees have job options, and volunteering this information about overall liquidation preferences builds trust.
- Exercising early and taxes: There can be tax benefits to exercising early. If the acquiring company pays cash for your vested shares, you will suddenly have a large chunk of income to pay taxes on. Exercising early can set you up for more favorable tax treatment, depending on the type of stock and when it was issued. You may also want to familiarize yourself with the alternative minimum tax (AMT), which can be triggered when you exercise incentive stock options (ISOs).
- If the acquiring company is public: Public companies have different restrictions than private companies, like trading windows and regulations, that may result in you not being able to sell right away.
Help your employees navigate tax decisions
Carta Tax Advisory helps employees make informed decisions about their equity and taxes—powered by Carta’s cap table platform. Learn how you can help educate your team.
This article was originally published on July 26, 2019.