Financial Advisor Insights

What happens to stock options after a company is acquired?

Stock options are a form of compensation that can give you the opportunity to buy your company’s stock at a discounted price. But what happens to stock options after a company is acquired? Depending on whether your options are vested or unvested, a couple different things could happen following a merger or acquisition. Since there are many different types of plans under the umbrella of stock options, it is important to review your specific situation with your financial advisor.

Vested vs unvested options

Stock options can be either vested or unvested. When your employer grants the options (typically incentive stock options or nonqualified stock options) they have a vesting schedule is attached, which is the length of time that you have to wait before you can actually exercise the option to buy shares.

If your options are vested, you’ve held the options long enough and can exercise them. If your shares are unvested, you still aren’t able to use the options to buy shares. Whether your options are vested or unvested will in part determine what happens to the stock options granted by your former employer. 

Treatment of vested options 

A vested option means you’ve earned the right to buy the shares. The new company could handle your vested options a few ways. One way is to cash out your options. The actual amount will depend on the exercise price of the options and the new price per share, but the effect will be the same: to liquidate your equity position.

The new company could also assume the value of your vested options or substitute them with their own stock. Both ways should allow you to continue to hold equity options or opt to exercise. If the acquiring company is private but has plans for an IPO, additional planning opportunities may be available to you. More on what can happen to stock options after an IPO here.

Unvested stock options

With unvested stock options, since you haven’t officially “earned” the value of your options yet, the acquiring company could potentially cancel the options. This typically happens for financial reasons or cultural – if the new company never offered equity to its employees before, they may not wish to change that now.

Although less likely, the acquiring firm could accelerate the vesting of your unvested options. This is not only costly to the company but can also create problems internally, as all employees would become vested whether they’ve “earned it” or not.

Also Read: Stock Options: ExplainedExplaining stock options and restricted stock units (RSUs)

Finally, the new company could assume your current unvested stock options or substitute them, the same as for vested options. You’d likely still have to wait to buy shares but would at least retain the unvested equity options.

In the end, what will happen to your stock options really depends on how the two firms decide to structure the deal and the specific terms of the options provided by your employer. As you can see, there are complex financial, legal, and retention issues at play.

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Kristin McFarland, CFP®Kristin McFarland, CFP® is a Wealth Advisor at Darrow Wealth Management and a contributor for U.S. News and other news publications. To learn more about working with a fee-only investment advisor and our approach to helping clients develop a diversified investment management strategy, schedule a free consultation today. 

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