
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.
More in Financial Planning
-
`
What Happens When You’re Booked in Jail?
Being arrested and jailed can be an overwhelming experience. The process may not look like the dramatic scenes you’ve seen in...
November 20, 2024 -
`
Leo DiCaprio’s Star-Studded 50th Birthday Bash
Leonardo DiCaprio’s 50th Birthday celebrations marked a significant milestone in the life of this Hollywood icon. Known for his legendary performances...
November 19, 2024 -
`
What Does Budget 2024 Mean for UK Business Owners?
In the much-anticipated Autumn Budget of 2024, UK Prime Minister Sir Keir Starmer rolled out some big changes affecting both individuals...
November 13, 2024 -
`
Hollywood Stars Who Stole the Show at the 2024 LACMA Gala
Blake Lively Stuns in Tamara Ralph Couture “It Ends With Us” star Blake Lively made a dramatic entrance at the 2024...
November 12, 2024 -
`
How Can You Leverage Higher Income Limits for Capital Gains Tax Benefits?
As tax laws evolve, understanding how to leverage higher income limits for the 0% capital gains bracket becomes essential for savvy...
November 7, 2024 -
`
Investor David Einhorn Thinks Peloton Can Be Worth Five Times More IF It Cuts Costs
David Einhorn, founder and president of Greenlight Capital, has a bold vision for Peloton. He believes the struggling fitness company could...
November 7, 2024 -
`
How Interactive Matter Maps Improve Legal Research and Planning
Interactive matter maps have transformed legal research and planning by simplifying how law firms manage complex matters. These tools help legal...
November 1, 2024 -
`
The Role of Global Mobility in Business Planning for 2025
In an era where the competition for top talent is fierce, the significance of global mobility in business planning cannot be...
November 1, 2024 -
`
Will AI Legal Advice Empower or Exclude Those in Need of Justice?
The rapid advancement of technology has introduced AI legal advice into the legal profession, creating both excitement and concern. Law firms,...
October 25, 2024
You must be logged in to post a comment Login