Key Points
- Public-to-private transitions (going private) impact employee equity compensationdue to changes in company ownership and valuation.
- Treatment of exercised stock optionsvaries – cash payouts, private share conversion, or cancellation – based on deal terms and option status.
- Fate of unvested stock options and RSUsis uncertain, ranging from acceleration and cash-out to cancellation depending on company policy and deal specifics.
- Consulting financial professionalslike tax experts or CPAs is crucial for understanding the tax implications and financial impact of different outcomes.
- Staying informed and preparedfor the potential effects on your equity compensation is key for navigating "going private" transactions as a tech professional or executive.
Introduction
Market fluctuations, interest rates, and company valuations can drive cycles of public companies "going private," creating uncertainty for both shareholders and employees holding stock options. Executives naturally question the fate of their equity compensation during this process.
While similar concerns may arise when a private company goes public through an Initial Public Offering (IPO), the picture is usually clearer due to pre-existing valuations in public markets.
Going Private Explained
The transition of a publicly traded company to a private entity, known as "going private," is a process where shareholders, often heavily influenced by institutional investors, approve offers such as private equity buyouts, management buyouts, or tender offers. If the offer is accepted, the shares of the public company are delisted and purchased, transforming the company into a private entity. Some public-to-private transactions are temporary strategic moves designed to improve financial health, with the potential for a future IPO.
These different moving parts create considerable uncertainty for employees with equity compensation.
Impact on Employee Equity Compensation
Upon the completion, known as closing, of a public-to-private transaction, public shareholders typically receive cash equivalent to the value of their shares. For employees who hold company stock through exercised options at the time of the employer's transition to private ownership, there is a possibility of incurring a short- or long-term capital gain during the finalization of the deal. This outcome depends on the specifics of their individual equity arrangements and the transaction terms.
However, the situation becomes more complex when dealing with unexercised stock options, restricted stock units (RSUs), or other forms of equity compensation. The fate of such compensation may only be clear once the take-private deal is finalized, and even then, it might take time to work out the specific details. Employees must understand the potential outcomes and how they may impact their financial plans and tax liabilities.
Understanding Potential Outcomes for Equity Compensation
The fate of your equity compensation during a "going private" transaction depends on various factors, including the type of equity, vesting status, and deal specifics. Here's a breakdown to help you anticipate scenarios:
Vested Stock Options:
- Cash Out:Assume your stock options have an exercise price of $10, the new buyout price is $15 per share, and you hold 1,000 options. The acquiring company might offer a cash payout of (1,000 options * ($15 - $10)) = $5,000, minus taxes.
- Assumption/Substitution:The new company may offer to substitute your options with 1,000 shares of their private stock. However, valuing privately held shares can be tricky, making future liquidity uncertain. Some companies try to ease the employee's concern about the illiquid market for the shares by providing a formula by which they would buy back the shares.
- Cancellation:If your options are "underwater" (exercise price > current price), the company might cancel them without a payout or offer a minimal sum, like $100 per option.
Unvested Stock Options & RSUs:
- Accelerated Vesting:Suppose you have two years of unvested RSUs worth $20,000. The company might accelerate vesting, granting you immediate access to the full amount. However, exercising options during a pending deal is often restricted to avoid impacting valuation.
- Cancellation:The company might cancel unvested grants to protect existing shareholders or manage costs. In this scenario, you will not receive any compensation. Cancellation is definitely a worse case scenario, and should this arise, you should attempt to negotiate compensation elsewhere if possible.
- Cash Out/Assumption/Substitution:Similar to vested options, unvested compensation might be cashed out, assumed by the new company, or substituted with their own equity. Expect vesting requirements (e.g., staying with the company for 1 year) in such cases.
Remember:These are just examples. Deal specifics, company policies, and individual circ*mstances can impact outcomes. Consulting your company's equity plan and seeking professional advice is crucial for understanding your specific situation.
Public-to-Private Transactions Are Complex
The impact of going private on executive equity compensation is complex, and employees need to make informed decisions to protect their financial interests. Seeking advice from financial planners, tax experts, or CPAs specializing in non-cash compensation can help employees navigate the complexities and understand how the changes will affect their financial plans.
As public-to-private transactions continue to increase, staying informed and prepared will be essential for tech professionals and executives with equity compensation. Understanding the potential outcomes and seeking professional guidance can help employees make informed choices during this transition.
If you have questions about equity compensation when going private or want to explore how aFlat-Rate Fee-Only structure can help youachieve your goals,schedule a time to talk.
Your financial well-being is too important to leave to chance. Choose wisely.
FAQ: Your Equity When a Public Company Goes Private
Q: What happens to my already exercised stock options when a company goes private?
A: Options may be cashed out, converted to private shares, or even cancelled depending on the deal terms and your option status. Consulting your company's equity plan and seeking professional advice is crucial.
Q: Will my unvested stock options and RSUs still vest after the company goes private?
A: The outcome varies. The company might accelerate vesting, cash out unvested grants, or simply cancel them. Understanding your company's policy and the deal specifics is essential.
Q: Should I seek professional advice regarding the impact on my equity?
A: Absolutely! Tax implications and financial ramifications differ based on your specific situation. Consulting financial planners, tax experts, or CPAs specializing in non-cash compensation is highly recommended.
Q: How can I stay informed about potential changes during a "going private" transaction?
A: Staying connected with your company's communication channels, attending informative sessions, and following relevant news updates can help you stay informed.
