If you own employee stock options in a private company it important to understand when they become valuable. You may be one of the first employees with a very low strike price or a new hire with a strike price that is equal to the current fair market value of the company, either way, your options don’t realize any value until your company goes through a liquidity event: an IPO or an M&A.
What are Mergers & Acquisitions (M&A)?
Mergers & Acquisitions or M&As includes multiples types of transactions between 2 (or more) companies, namely the obvious: Mergers and Acquisitions.
Mergers
A merger is the combination of 2 (or more) companies, given the approval of their shareholders. In a merger, the acquiring company typically continues to operate, while the acquired entity will cease to exist. For example, in the 2010 merger between United and Continental Airlines, Continental cease to exist and the combined company kept United as its name. Companies may also combine their names such as with the 1998 merger between Exxon and Mobil, forming Exxon-Mobil.
Acquisitions
In a standard acquisition. the acquiring company buys a majority stake in the acquired company, yet the acquired entity remains operational and continues to conduct business under its original name and structure. For example, in 2017 Amazon bought Whole Foods, but you don't go into Amazon stores to buy groceries, because Whole Foods still operates as if it is a standalone company.Now, you may wonder "what happens to my employee stock options if your private company goes through an IPO or M&A event?"
What happens to employee stock options in an M&A?
Like an IPO, M&As are also great news. There are two typical outcomes if you have employee stock options and an M&A occurs, the acquiring company can cash you out or give you company shares. If the acquiring company cashes you out, your outcome is simple: you receive cash and pay taxes on the gains. If the acquiring company decides to give you company shares, either you will receive publicly traded shares, and your situation will mimic the IPO outcome, or if acquired by a private company, you will receive private shares and you will be back in the same situation as before: waiting for liquidity.
For more information on how to monetize your private company equity, please contact us below.
FAQs
The treatment of stock options during an acquisition depends on your option grant agreement, the acquisition deal structure, and whether your shares are vested or exercised. Exercised Shares: Generally, exercised shares are either paid out in cash or converted into common stock shares in the acquiring company.
What happens to my stock if there is a merger? ›
When the deal is closed, existing shareholders will receive cash in return for their stock (i.e., their shares will be sold to the acquiring company). If a public company takes over a private firm, the acquirer's share price may fall a bit to reflect the cost of the deal.
What happens to your shares when there is a takeover? ›
If you hold the acquired company, these shares will be replaced by either cash or new stock in the acquiring company, or both, depending on the terms of the deal.
How does M&A affect shareholders? ›
For the target company, an M&A transaction gives its shareholders the opportunity to cash out at a significant premium, especially if the transaction is an all-cash deal.
What happens to shareholders equity in a merger? ›
The acquirer can pay cash outright for all the equity shares of the target company and pay each shareholder a specified amount for each share. Alternatively, the acquirer can provide its own shares to the target company's shareholders according to a specified conversion ratio.
What happens to stock options when acquired? ›
The treatment of stock options during an acquisition depends on your option grant agreement, the acquisition deal structure, and whether your shares are vested or exercised. Exercised Shares: Generally, exercised shares are either paid out in cash or converted into common stock shares in the acquiring company.
Should I sell stock after merger? ›
Change in Ownership or Merger
Sometimes it may make sense to sell a stock if a company has been acquired or merges with another company. Many times the stock price can rise dramatically if it is acquired for a significant premium. As a result, investors may sell the stock after the merger.
Do I have to sell my shares in a takeover? ›
A Shareholder cannot generally be forced to sell shares in a company unless you have either agreed to a process resulting in that outcome, or the court orders that outcome.
Do takeovers help or hurt your stock? ›
In most cases, the target company's stock rises because the acquiring company pays a premium for the acquisition, in order to provide an incentive for the target company's shareholders to approve the takeover.
Can a company take your stocks away? ›
In California, it is against the law to fire an employee to prevent them from accruing or vesting wages, including stock options and other equity rights.
Mergers and acquisitions offer numerous benefits to companies, employees, and stakeholders. Companies achieve market expansion, diversification, synergies, and a competitive edge through M&A transactions.
Is a merger good for shareholders? ›
Merging with a new company means bringing on a big new addition, and all that comes with it. For target companies, shareholders or owners can see a big payday as a result of a merger, and they may benefit from access to a bigger pool of resources owned by the acquiring company.
Why do mergers and acquisitions destroy shareholder value? ›
Overpaying and overvaluation are considered the top among the major reasons why most mergers and acquisitions (M&A) fail to create value. Often, companies are drawn by the potential of a target.
What happens to stocks during a merger? ›
The target company's stock price usually rises due to the deal; an acquiring company pays a premium on the target shares to win the appreciation of the target company's shareholders. Thus, with the premium paid, the selling company stocks get higher and can attract more potential investors.
What happens to stock options when a 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.
What happens to stock options if the company never goes public? ›
Nothing in particular happens to employee stock options if the issuer fails to go public, they simply persist as stock options according to the terms of the option plan and option grant. That means they continue vesting, vested (and in a few cases unvested) options can be exercised at any time and…
Do stocks go up after mergers? ›
Acquiring a company comes with a cost, which is called a premium. The acquiring company pays the premium for the work that built the company from scratch. The stock prices of the acquired/target company tend to rise as they receive a premium from the acquiring company.
What happens when a stock is delisted due to merger? ›
If the stock is delisted voluntarily, such as in the case of a merger or acquisition, then shareholders may be bought out or receive shares in a new company. Delisted stocks can be traded over the counter.
Does merger affect shareholders? ›
However, mergers can have a significant impact on shareholders. This process can make it difficult for shareholders in each company involved to know what to expect and how their respective share values will be affected.
