When you hear that your company is being acquired, it can be exciting and a little stressful at the same time. Maybe the deal feels like good news, but if you have stock options, you’re probably asking one big question: what happens to stock options when company gets acquired?
Acquisitions can sound complicated, but once you understand the basics, you can make calm, informed decisions about what comes next.
Here’s what usually happens to your stock options during an acquisition and how to prepare for it.
Step 1: Identify the Type of Acquisition
The first thing to figure out is what kind of deal it is. Most acquisitions fall into one of two main types.
- All-cash acquisition: The acquiring company pays cash for all outstanding shares.
- Stock or hybrid acquisition: You receive new equity in the acquiring company, or a mix of cash and equity.
Each type affects your stock options in a different way.
Step 2: All-Cash Acquisitions
In an all-cash deal, things are usually the most straightforward. Your vested shares and vested but unexercised stock options are cashed out.
Here’s how it works. Your payout is based on the acquisition price multiplied by the number of shares or exercisable options, minus your exercise price.
Let’s say your company is being bought for $67 per share, and your strike price is $2. You have 50,000 vested options.
The math looks like this:
67 – 2 = 65.
65 x by 50,000 = 3,250,000
Your total payout would be $3,250,000 before taxes.
The most important thing to understand here is how the payout will be taxed.
When your unexercised stock options are cashed out, that income is usually treated as ordinary income and subject to withholding. Many companies use the standard supplemental withholding rate of twenty-two percent, but depending on your income level, your actual tax rate could be thirty-five percent or higher.
If your company withholds too little, you may owe more taxes next April. You also want to know whether your company withholds anything for incentive stock options, since some companies do not.
Once you know the withholding rate and your expected taxes, you can calculate your net cash flow – the amount you’ll actually receive after taxes. That number will help you plan what to do next, whether that means investing, saving, or setting some money aside for taxes.
Step 3: Stock or Hybrid Acquisitions
Not every deal pays out in cash. Some acquisitions pay you in stock of the acquiring company, or in a mix of stock and cash.
When that happens, your current stock and options are usually converted into the new company’s equity. The company sets a conversion rate that ensures the overall value of your equity stays roughly the same. In other words, you will not lose or gain value simply because the shares are changing from one company to another.
For example, if you owned one thousand shares worth fifty dollars each, and the acquiring company’s shares are worth one hundred dollars each, you might receive five hundred shares of the new company. The value stays the same, but the number of shares changes.
The conversion details will be outlined in the documents the company sends you. It is a good idea to have an advisor look over those communications to make sure you understand exactly how your options and shares are being converted.
Step 4: What Happens to Unvested Options
Unvested options are another important piece to pay attention to.
In some acquisitions, your unvested options are converted into new unvested options in the acquiring company, following the same vesting schedule you had before.
In other cases, you may receive accelerated vesting, which means some or all of your unvested options vest immediately when the acquisition closes. This is more common in all-cash deals where the acquiring company wants to pay everyone out at once.
Always check your equity grant documents carefully so you understand what will happen to both vested and unvested options in your specific situation.
Step 5: Focus on What You Can Control
It’s normal to feel uneasy when there are changes to your company and your equity. Most of the time, your company is not trying to reduce your value in the deal.
The key is to stay informed and focus on the numbers that matter: your taxes, your withholdings, and your final cash flow. Once you know your net payout, you can start building a plan for what to do with the money, whether that’s investing, saving, or funding a future goal.
Get Advice for Your Situation
Every acquisition is different, and so is every equity package. If your company just announced a deal and you are unsure how it affects your stock options, we can help.
At KB Financial Advisors, we work with tech employees and startup professionals to make sense of complex equity events such as acquisitions, IPOs, and layoffs.
We will help you understand your payout, model your tax scenarios, and create a plan for your cash flow once the deal closes.
Schedule a call with us today. A single consultation can give you clarity and confidence about what to do with your stock options during your company’s acquisition.
