what happens to employee stock options when a company is bought out

The primary goal of most VC-backed companies is an exit. There are essentially 2 ways to achieve this goal: become public or get acquired past another visitor. Concluding calendar week nosotros discussed in detail what happens to employee shares and stock options when a visitor goes public. This mail service will cover the more frequent leave event – an acquisition.

The M&A

While the dream for many startups is to go public, in reality the Chiliad&A (mergers and acquisitions) route is a much more than common one. Co-ordinate to CB Insights, but iii% of exits in 2015-2016 were IPOs (initial public offerings), while the rest (about 6,700 out of 6,900 exits) were through a merger or an acquisition.

Whether it's a direct competitor, a large company that wants to expand online, or the corporate incumbent your visitor was trying to defeat, the possibility that 1 of these companies will learn the startup you piece of work for is your best shot for an exit.

But what happens to your shares and options when that happens?

If you lot want a quick refresher on options basics, we always recommend starting here.

Stock vs. Cash K&A

When company A (we'll call information technology Acquirer) acquires your visitor (we'll telephone call it Target), information technology tin can pay for the Target'due south shares in ii ways – with cash or with Acquirer shares. The conquering transaction can be structured as a full cash transaction, a total stock transaction, or a mixed stock and cash transaction. The course of bounty (greenbacks or stock) tin have a pregnant bear upon on the value that Target'due south founders, investors, and employees get from the transaction, and more than importantly, how fast they tin turn that value into cash.

While twenty years ago, most tech acquisitions were stock acquisitions, in contempo years, most 90% of tech One thousand&A transactions were cash ones. We'll practise our best to encompass both options equally simply as possible.

Vested Options That Accept Been Exercised, aka Shares

If you lot already own shares, it's pretty uncomplicated. You will get proceeds in either greenbacks or Acquirer stock based on how many common shares you own.

While this is not the topic of this post, it'south of import to note that your proceeds may not necessarily reflect your buying percent in Target. Pregnant, if Target was sold for $100 million and your shares stand for 0.i% ownership, you lot may non necessarily go $100,000. The reason for that is that venture capital letter investors typically take preferences and priorities that can bring that number down (we'll comprehend that in another postal service). If your company is sold for a very loftier price compared with how much information technology raised from such investors, it'south possible that you'll become your "total" $100k, but in other scenarios, you may get less. In other words, the price per-preferred-share (what investors get) and the price-per-common-share (what y'all become) may be dramatically different in an acquisition.

Going back our topic, let's assume that you own 10,000 shares and the price-per-share that common shareholders get in the acquisition is $10, you will go either $100,000 in cash (pre-tax) or in Acquirer stock.

Cash is unproblematic, but what nigh stock? If Acquirer is a public company, you'll be able to sell the shares and turn them into cash immediately. You tin besides choose to hold them for as long equally y'all'd like if you believe that they will continue to appreciate. If Acquirer is a private visitor, things go tricky and you'll have to understand the transferability of Acquirer shares. In some cases, you'll be able to sell them, but it could very well exist that your position will be unchanged from earlier the acquisition. That means y'all'll still be in "expect-for-leave" mode, simply at present yous'll have Acquirer shares instead of Target shares.

Vested Options That Have Not Been Exercised

In most cases, employees volition preserve the value of their options when their visitor gets acquired.

If it's a cash bargain, they will typically get "cashed-out", which means they will receive cash for the value that represents the difference betwixt the price-per-share that common shareholders get in the acquisition and their strike cost. This is essentially like exercising the option and selling the share immediately.

Going back to our example above, if the price-per-share common shareholders get is $10, and y'all have 5,000 vested options that have yet to be exercised at a strike toll of $1 per share, your proceeds will exist $45,000 [($ten-$1)*5,000]. If the cost-per-share is lower than the strike price, your options are basically worthless.

If it'due south a stock deal, your vested options in Target volition most likely convert to Acquirer stock options using a ratio and strike cost that preserve their value (if greater than aught). At that indicate, you'll have to decide whether to exercise them or wait. If the Acquirer is public, you can do your options and sell the shares immediately. If the Acquirer is private, you'll probably accept a more difficult time liquidating the shares post-exercise.

Unvested Options

This one is a little trickier. Acquirer may choose to replace your Target unvested options with new Acquirer options that requite you the same value, only information technology could also offer y'all a completely different bounty package that may non fifty-fifty include stock options.

In some cases, an acquisition will trigger vesting acceleration for some employees. That means that a portion or all of your unvested options will vest in one case an acquisition is completed. Dispatch is typically a right held for executives that have such clause in their bounty plan, but it tin also be applied to others in the organization if the acquisition agreement indicates so.

Good Luck!

While y'all can't really impact whether your company is acquired for cash or stock, the one thing you can practise is build great companies and increment the probability that all stakeholders, including employees, will go what they've earned on an exit.

Good luck!

[Note: we did not cover whatsoever M&A tax consequences in this post, just we volition encompass this important topic in a after post]

All data provided herein is for informational purposes simply and should not be relied upon to make an investment decision and does not intend to brand an offering or solicitation for the sale or purchase of whatsoever specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is information technology to be relied on in making an investment or other decision. Readers are recommended to consult with a financial adviser, attorney, accountant, and any other professional person that tin help you sympathise and assess the risks associated with any investment opportunity. Individual investments are highly illiquid and are not suitable for all investors. Securities on the EquityBee platform are offered through North Capital Private Securities, member FINRA/SIPC.

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