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  • Nick Burgess

What Happens to Stock Options When My Company is Acquired?

In my 9-5 life, I'm currently experiencing my third company acquisition in the last three years. This got me thinking: what actually happens to incentive stock options for employees when a company is acquired?

someone touching a screen that says M&A

In a down economy, you don't usually see a large number of m&a transactions. However, some companies have no choice but to force through a tender offer to another company and strike that sweet, sweet m&a deal. When a company is acquired, the fate of its employee stock options depends on the terms of the acquisition. Company stock options are a form of equity compensation that gives employees the right to purchase shares of the company's stock at a predetermined price, known as the strike price. In the event of an acquisition, the treatment of outstanding stock options can have a significant impact on the financial well-being of employees who hold them, as employees in the new economy see company share price and an options contract as their ticket to financial freedom.

There are generally three possibilities for what can happen to stock options in the event of a company acquisition:


  1. Stock options are canceled: In this case, the options are typically worthless, and employees do not have the opportunity to exercise them. This outcome is common when a company is being acquired in a cash transaction, as the new company may not want to assume the obligation of outstanding stock options. When options are canceled, employees typically receive no compensation for the loss of their options.

  2. Stock options are assumed by the acquiring company: In this scenario, the acquiring company may choose to assume the outstanding stock options of the acquired company and allow employees to continue to hold and exercise their options to the expiration date. The acquiring company may also choose to modify the terms of the options, such as the exercise price or the vesting schedule. When the acquiring company assumes the options, employees have the opportunity to continue to benefit from their options (such as capital gains appreciation), but the terms may be different than what was originally agreed to when the options were granted. These types of flexible plans are common in stock-for-stock mergers.

  3. Stock options are converted into options or restricted stock units (RSUs) in the acquiring company: In this situation, the options are typically converted into options or RSUs in the acquiring company, with terms that are similar to the original options in number of shares and purchase price. However, the conversion rate may be adjusted to reflect the change in the underlying stock price. In this scenario, employees continue to hold equity in the acquiring company, but the terms of their options may change.

The specific treatment of stock options in a company acquisition is defined by the terms of the acquisition agreement and the type of option plan. It's important for employees to understand the terms of their option plan and the acquisition agreement to determine how their options may be impacted by an acquisition.

In some cases, the acquiring company may offer employees new equity compensation of their own stock, such as options or RSUs, as part of the acquisition. This can be a way for the acquiring company to retain key employees for a period of time and align their interests with those of the company. However, it's important for employees to carefully evaluate the terms of any new equity compensation, as they may be different than the original options and may not provide the same financial benefits.


In addition to the treatment of stock options, employees should also consider the impact of the acquisition on their job security and future career prospects. In many cases, acquisitions can result in job losses, as the acquiring company may look to streamline operations and eliminate duplicative positions in order to save some cash on the balance sheet. In other cases, employees may have new opportunities for career growth and advancement with the acquiring company.


When a company is acquired, it's important for employees to consider the financial implications of the acquisition on their employee stock option plans and to seek professional financial advice if needed. In some cases, employees may choose to exercise their options prior to the acquisition in order to lock in the value of their equity compensation. However, this decision should be made after careful consideration of the terms of the acquisition and the potential tax implications of exercising the options as the tax burden you might face could outweigh what you think is a prudent investment decision. A financial advisor can be invaluable in these types of situations.

Conclusion

In conclusion, the fate of stock options in a company acquisition can have a significant impact on the financial well-being of employees who hold them. There are generally three possibilities for what can happen to stock options in an acquisition: they can be canceled, assumed by the acquiring company, or converted into options or RSUs in the acquiring company. The specific treatment of stock options is defined by the terms of the deal and the merger agreement. It is important for employees to understand the terms of their option plan and the acquisition agreement, as well as to consider the impact of the acquisition on their job security and future career prospects.

In some cases, employees may choose to exercise their options prior to the acquisition to lock in the value of their equity compensation, but this decision should be made after careful consideration of the terms of the acquisition and the potential tax implications of exercising the options. Seeking professional financial advice from a financial adviser may also be beneficial in this situation.

Regardless of the outcome, employees should take the time to understand the impact of the acquisition on their stock options and to make informed decisions that are in their best financial interests. In the end, it is important to remember that equity compensation, such as stock options, is a long-term investment and should be considered as part of a comprehensive financial plan, and you should weigh them against your own current market price and how your new owners might view you.

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