Due to the magnitude of merger and acquisition (M&A) activity in both the private and public markets, it is important for founders, executives, and employees to all consider the effect a consolidation could have on stock options. In some cases, treatment may be found in the individual’s grant package in a section regarding change in control, or qualifying events. However, there may be a few general outcomes for different types of equity depending on the structure of the transaction.
| EXERCISED SHARE | UNEXERCISED VESTED OPTIONS |
UNEXERCISED UNVESTED OPTIONS |
|
| CASH-OUT | An acquirer usually pays cash consideration for stock in the acquired. | An acquirer may pay cash consideration net of the strike price for vested options in the acquired. This consideration may be subject to holdbacks. |
An acquirer may pay cash consideration net of the strike price for unvested options in the acquired. This consideration may be subject to restrictions. |
| ASSUMPTION, OR SUBSTITUTION | An acquirer may pay equity consideration in the acquirer for stock in the market. | The acquirer may assume or substitute the acquirer’s equity net of the strike price for vested options in the acquired. This substitute equity may be subject to holdbacks. |
The acquirer may assume or substitute the acquirer’s equity net of the strike price for unvested options in the acquired. This substitute equity may be subject to restrictions. |
| ACCELERATION | Should not result in any change. | The acquirer may allow the chance to exercise options during or after the M&A deal closes. |
The acquirer may accelerate the vesting of options and allow the chance to exercise options during or after the M&A deal closes. |
| CANCELLATION | Should not result in any change. | An acquirer may cancel underwater vested options in the acquired. |
An acquirer may cancel unvested options in the acquired whether underwater or not. |
Although it’s important to be aware of some of the possible outcomes of stock options in a business combination, or a potential exit like an IPO, the best time to plan is when an individual first joins a company or is granted an equity award.
Author: Kristyn Amato | [email protected]
