As massive companies like Google and Salesforce keep buying out startups, your likelihood of finding out your company got acquired only goes up.
And if you’re a tech employee sitting on stock options and company equity, this could be a massive wealth-building opportunity for you. The question is: would you prepared with the right moves if this happened tomorrow? (Or if you’ve just found out it happened, so you did a frantic Google search & this article came up?)
If not, this post has you covered. Here’s what you need to know, think through, and decide if you learn your company got acquired.
The 3 Types of Liquidity Events You’re Likely to Face as an Employee with Stock Options
Tech employees are most likely to see one of three major liquidity events if they work at a successful startup that catches the eye of the public, investors, or other massive corporations:
1. The IPO
Initial public offerings require you to know exactly what kind of equity compensation you hold and what to do with it.
Mistakes here could lead to massive tax consequences, which is why we often advise employees working at companies about to go through an IPO work with both a financial planner and a tax professional who understands the nuances of stock options.
2. The Tender Offer
A tender offer is an alternative to an IPO, and we’ve seen more and more companies take this route rather than dealing with an initial public offering. That could be a good thing for you as an employee, as IPOs tend to come with way too much speculation.
In a tender offer, an investor offers to buy shares from current stakeholders (which include employees). When this happens, the offer to buy your shares is usually higher than what they’re actually worth at the time of the tender offer — which provides a great opportunity for you.
3. The Acquisition
And of course, there’s the situation in which your company got acquired. Acquisitions are different than both tender offers and IPOs, and therefore, how you should prepare for and handle them looks different too.
Acquisitions take longer to complete than tender offers, and they’re far more complex. There is no standard process for an acquisition, and it’s hard to predict exactly what will happen in each individual case.
But acquisitions don’t usually leave employees hanging as long as IPOs do. Acquisitions take less time — and as a bonus, you won’t face lock-up periods and may not face deadlines around trading windows.
However, if your company got acquired, there may not be any public filings like there are with IPOs. During initial public offerings, companies usually do a great job communicating with employees.
But in acquisitions? There’s typically very little communication from those executing the agreement because they’re usually consumed with just trying to close the deal.
That means you can’t necessarily rely on your company to give you all the direction you need. You need to get prepared on your own, and the right moves to make will depend on the kind of acquisition your company goes through.
The 3 Types of Acquisitions You’ll Likely See
If your company got acquired, it usually happened in one of three ways:
1. An All-Cash Deal
This is the simplest and most straightforward type of acquisition — and as an employee, you may have very little choice or say in what happens to your stock options.
The deal closes and all your shares and options get cashed out. The good news is that you don’t have to worry about any kind of strategy; this is happening whether you decide to take action or not.
The big downside? You get stuck with the tax consequences of converting that equity to cash and you face an immediate decision on what to do with that cash to make the most of it.
2. An All-Stock Deal
This kind of acquisition is far less simple than an all-cash deal.
There may be conversion formulas for how many shares or options of the new company you will receive. You must make more choices around when and how to sell. Your old cost basis may be your new cost basis in the shares of the acquiring company.
And these events may or may not be taxable. So be careful if your company got acquired through an all-stock deal. Read the terms of that deal carefully — and get serious about hiring a financial and tax professional to help you sort through the choices you need to make.
3. A Blended Deal Involving Both Cash and Stock
If an all-stock deal is complicated, a blended deal where you end up with both equity and cash is even more so. These types of acquisitions are often the hardest to understand.
You have some choice in how you liquidate and you will face tax consequences that are both immediate and possibly delayed. Again, beware, and be very, very careful about how you proceed here.
Even if you consider yourself pretty financially smart and savvy — and you may very well be! — these kinds of events are difficult even for many financial planners to properly understand and make rational decisions around.
A Tale of Two Acquisitions: Salesforce and Mulesoft, and Two Private Companies
We can walk you through two quick case studies to illustrate the kinds of decisions you need to make — and mistakes to avoid — if your company got acquired. Both acquisitions involved current clients.
Salesforce Acquires Mulesoft
Earlier this year, Salesforce, a public company, acquired another public company, Mulesoft. Public filings abounded. Both companies staffed well-built HR teams. Communication between Salesforce and Mulesoft, and the companies and their employees, was strong.
The result was a lot of clarity around the timing and details of the acquisition, which positioned employees to make smart decisions with confidence.
Our client, a Mulesoft employee, held a combination of of ISO, RSU, and ESPP shares. Their ESPP shares and vested RSUs were cashed out and converted to Salesforce shares, while their Mulesoft options were converted to Salesforce options.
Based on this, here’s the approach we took with the decisions we needed to make:
- First, we sold all RSU and ESPP shares. (In most cases, selling RSUs ASAP is the right choice.)
- We advised the client to keep their options, for now.
(This being said, there is no single standard approach to stock options. Your specific situation will dictate what strategy is best for you.)
The issues we needed to overcome in the process included the fact that moving from Mulesoft to Salesforce meant dealing with new systems as stock options were moved from one vendor to another.
The process was well communicated, which made things easier — but the taxes have been hard to follow. We’ve reviewed all the details (more than once) and from what we know, we developed our best guesses for how the acquisition will be reported to the IRS.
We’ll have to verify our initial assumptions as 1099-B, statement of taxable income, forms W2, and more start to arrive next year, but we have a solid game plan and, as far as acquisitions go, the planning for this client was rather straightforward and made it possible to do the planning.
Contrast this with our other case study, where a private company acquired another private company.
A Private Company Acquires a Private Company
One small company purchased another very small company with an all-cash deal. This simplified the choices we needed to make — but we faced a serious lack of communication as we tried to assist our client, an employee at the acquired company, in taking the right actions.
To start, we knew the deal was supposed to close on a Friday. The following Monday, our client received a notification that it did not close nor was there a new expected date to finalize the deal.
Then, without warning on the next Friday, the deal closed. The client was supposed to receive their payout a week later — and they did not.
Talk around the office revealed that the client and one other person were the only two to not get paid yet! The day after, 100% of the cash owed to our client was wired into their bank account.
And this presented a problem.
The client had vested, unexercised ISO. The way the deal was supposed to go, the majority of the vested options would be cashed out and the immediate payout was to be processed through payroll, with income tax withholdings.
The remainder of the options would be held in escrow, to be paid out in three installments at 10, 20, and 30 months of continuous employment.
But what actually happened was the client received that 100% immediate payout straight to their account with zero tax withholdings. The client was also told this cash would be treated as incentive stock options, taxed at long-term capital gains rate.
Wrong, wrong, wrong.
The acquisition is a disqualifying disposition of ISO taxed as ordinary income, and that meant our client received more than a $1 million of ordinary income with no income tax withholdings.
There were some aspects of this that were out of the client’s control (and ours), but had the client not worked with us they would have no idea how misleading the information they received truly was.
Had they acted on the bad information, they would be put in an even worse financial situation.
Acquisitions can be some of the most confusing and most stressful liquidity events you face as a tech employee. So again: beware and be prepared.
Your Company Got Acquired: What Do You Do Now?
Before you start making brash moves in your finances, it’s best to have a thought-out, methodical plan in place. One that takes into account your potential wealth gain and the taxes you’ll have to pay on it. The best thing you can do is hire someone who’s been there and done it countless times before. Someone who’s seen it all when it comes ti company acquisitions, and can make sure you avoid unfortunate mistakes while you capitalize on your wealth.
To schedule a consultation with one of our advisors who’s worked through a lot of different acquisitions, click on the button below. We’ll talk to you soon!