Here’s What Happens to Stock Options When a Company Is Acquired

When a company gets acquired, the acquiring company often has a set strategy for dealing with stock options. These strategies can vary, but they usually fall into a few common categories. First, let’s look at what happens when stock options are vested.

Vested stock options are those that employees have earned the right to exercise. In an acquisition, vested options are often treated as a form of currency. They can be converted into options of the acquiring company or cashed out. The exact treatment depends on the terms of the acquisition agreement.

Faux / Pexels / For employees holding vested stock options, this can be a windfall or a disappointment, depending on the terms.

If the options are cashed out, it usually means receiving a lump sum based on the acquisition price. This can provide immediate financial benefits but might also come with tax implications. On the other hand, converting vested options to the acquiring company’s stock can offer the potential for future growth.

However, this depends on the acquiring company’s performance and the new vesting schedule.

What Happens to Unvested Stock Options?

Unvested stock options are another story. These are options that employees have not yet earned the right to exercise. The fate of unvested options in an acquisition can be more uncertain. Some acquiring companies choose to honor the vesting schedule of the original options, meaning employees can continue to earn them over time. This approach is often seen as a way to retain talent and ensure a smooth transition.

However, not all acquisitions handle unvested stock options this way. Some may accelerate the vesting schedule, allowing employees to vest all their options immediately. This is often referred to as “accelerated vesting.” While it sounds like a great deal, it can also have tax implications. Immediate vesting might push employees into a higher tax bracket, leading to a significant tax bill.

Alternatively, some companies might cancel unvested options altogether, offering a cash payout instead. This can be less advantageous, especially if the payout is not as generous as the potential stock growth.

Impact of Acquisition Structure on Stock Options

The method of handling stock options during an acquisition can also depend on the acquisition’s structure. There are generally two types of acquisitions: stock purchases and asset purchases.

Rebrand / Pexels / In a stock purchase, the acquiring company buys the shares of the target company.

This type often leads to a smoother transition for stock options. In contrast, an asset purchase involves buying the assets of the target company rather than its shares. This can complicate the situation for stock options. In such cases, the acquiring company might not take on the target company’s stock plans, leading to the cancellation of existing options.

Employees might receive cash payouts, but the terms are often less favorable than in-stock purchases.

How to Navigate the Changes as an Employee?

For employees, the acquisition can bring uncertainty and anxiety. Hence, it is essential to stay informed and understand the details of the acquisition agreement. Reviewing the company’s stock option plan and any communication from the acquiring company can provide clarity.

Buro / Pexels / Consulting with a financial advisor or tax professional can be beneficial. They can help navigate the complexities and provide personalized advice based on individual circumstances.

Apart from that, tax implications are a significant consideration when dealing with stock options in an acquisition. The way options are handled can impact an employee’s tax situation dramatically. For vested options that are cashed out, the payout is typically treated as ordinary income, subject to regular income tax rates.

If vested options are converted to the acquiring company’s stock, capital gains tax rules may apply when those new shares are eventually sold. The holding period and the price difference between acquisition and sale will determine the tax rate.