What happens to stock options or awards after a company is acquired? Depending on several factors, such as what type of equity plan you have and whether your grant is vested or unvested, a few different things could happen following a merger or acquisition. Since there are many different types of potential outcomes and considerations for professionals during an acquisition, it is important to review your specific situation with your financial advisor.
What type of equity plan do you have?
There are many different types of equity plans a company can use to incentivize staff. It is also not uncommon for employees to receive multiple different types of equity-based compensation at once.
Stock option plans options typically include incentive stock options or nonqualified stock options, where employees must actually purchase the shares with cash or exercise their options and immediately sell enough shares to cover the cost of the purchase, otherwise known as a cashless exercise or a sell-to-cover.
What happens to these forms of equity compensation following an acquisition? Unfortunately, the answer is ultimately going to be specific to the deal and is likely to be rather complicated.
The M&A timeline
In all likelihood, if you work for a public company, there will be considerable lag time between when you first learn of the deal and when it's actually approved by shareholders, perhaps regulatory agencies, and then finally completed. Until the terms of the merger or acquisition are finalized, employees won't have answers to the lingering questions about what will happen to their stock compensation.
Once the guidance is released, it may still take more time to work through what exactly it means for you, particularly if you have multiple forms of equity compensation with different vesting schedules, strike prices, and so on. Even with the terms released, you may still have to wait until the deal is finalized to calculate your potential payout, if the stock prices in the days or weeks before the close play a role in the calculation. As you wait, try to address some of the other personal financial challenges associated with M&A activity.
Vested vs unvested shares
Stock options or awards can be either vested or unvested. When you receive a grant, there will typically be a vesting schedule attached, which outlines how long you have to wait before you can exercise stock options to buy the shares, or in the case of equity awards, are given shares or cash.
It is important to note that restricted stock units (RSUs) and restricted stock awards almost always settle in shares or cash upon vesting, so holders are typically not yet vested.
For option-holders or individuals with stock appreciation rights, once vested, you can likely exercise any 'in-the-money' options/awards (more on that below), provided you understand the tax consequences.
If your shares are unvested, you haven't yet earned the shares, at least not under the original 'pre-deal' vesting schedule. Whether your options are vested or unvested will in part determine what happens to the stock granted by your employer.
Treatment of vested options or awards
Vested shares means you’ve earned the right to buy the shares or receive cash compensation in lieu of shares. The acquiring company or your current employer could handle vested stock in a few ways. One way is to cash out your options or awards. The actual amount you could receive will likely depend on your current exercise/strike price, the new price per share, or any other payment terms negotiated by the firms, but the effect will be the same: to liquidate your equity position.
The new company could also assume the value of your vested options/awards or substitute them with their own stock. Both ways should allow you to continue to hold equity awards 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 or awards
With unvested stock, since you haven’t officially “earned” the shares, the acquiring company could potentially cancel the outstanding unvested grants. Some common financial reasons for this outcome include concerns about diluting existing shareholders or the company couldn't raise enough cash through new debt issues to accelerate unvested grants.
The acquiring firm can also accelerate the vesting of options or awards, choosing to pay cash or distribute shares, in exchange for the cancellation of outstanding grants. Even when available, accelerated vesting may not be offered uniformly across equity types or grants.
For example, the terms may provide a new vesting schedule, where unvested grants will receive accelerated vesting depending on when they would have been earned if the deal were not to occur. Grants that wouldn't have vested for a long period of time may be cancelled with or without compensation, partially vested, or continued. This type of arrangement could apply universally to all employee stock offered in the incentive plan, or only to certain types.
The new company could assume your current unvested stock options/awards or substitute them, the same as for vested options. You’d likely still have to wait to buy shares or receive cash, but could at least retain the unvested equity.
In another scenario, as recently seen in the Takeda acquisition of Shire, some awards could be assumed based on a predetermined valuation outlined in the terms of the deal, and paid out according to the original vesting schedule, provided that the employee remain with the company.
Underwater shares, vested or not
Certain types of equity compensation can become 'underwater,' meaning the current market value is less than the strike or exercise price, which is what you would have to pay to buy the stock or exercise your award. Incentive stock options, stock appreciation rights, and non-qualified stock options are common examples.
If your grant is underwater, the acquiring company may not want to be so generous, as even vested shares are technically worthless. Employees may be given a nominal payment by the acquiring or acquired firm in exchange for cancelling the grant. Depending on your strike price, it may even be difficult to determine whether your vested or unvested grant would be considered underwater when the acquisition is complete, depending on the shareholder payout or other specific terms indicated in the agreement.
In the end, what will happen to your stock options or equity compensation 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.
(Note: Darrow Wealth Management offers Private Wealth and Asset Management to individuals and families. This article is not a substitute for personalized tax or legal advice from a CPA, tax advisor, or attorney. Darrow Wealth Management does not provide tax or legal advice; for inquiries regarding your personal tax or employment situation, consult a CPA or employment attorney in your area.)