Being Acquired
Key things to know/consider/prepare for when your company is being acquired
Pre-Read: Key Questions This Article Answers
How does an acquisition impact my stock options/RSUs?
Why does the type of acquisition (cash/stock/hybrid) matter; and how will it impact my stock comp?
As an employee, what are the key decisions I need to make and risks to consider when my company is being acquired?
What It Means to Be Acquired
When one company is acquired by another company, it means the acquiring company purchases the target company (or at a minimum, acquires a 51% controlling interest). As noted below, the purchase can be paid for with cash, stock, or a mix of both.
Acquisitions usually have multiple steps: (1) an offer is made; (2) negotiations may occur, (3) the offer is accepted (and shortly after the acquisition is announced), (4) post-acceptance diligence occurs, and (5) the deal officially closes and payment is made.
After an acquisition, the acquiring company fully owns the business, and can operate it in accordance to its wishes and plans. This includes integrating the acquired company's technology, systems, operations, and people into its existing operations, as well as potentially the implementation of strategic changes (e.g. headcount reductions in duplicative roles).
How an Acquisition Impacts Your Stock Comp
We wish we could say “this is what will very likely happen to your stock comp," but alas, like most things in stock-based-compensation, the devil is in the details. At a high level, there are two key factors that will determine most of what is going to happen to your holdings:
Key Factor 1: Type of Equity and/or Stock Options You Own; Vested or Unvested; and Unique Features
There are a number of stockholders and stakeholders in a company, and an acquisition is a complex undertaking. Determining what will happen for your ownership holding(s) depends a lot on the type of ownership/exposure you have:
Shares of common stock. If you’ve exercised a vested stock option (e.g. an NSO or ISO), you own shares of stock in the company. In most situations, the acquiring company will need to purchase these shares from you pursuant to the terms of the acquisition (cash, stock, or hybrid mix).
Vested stock options (ISOs or NSOs). If at least a portion of your stock options are vested, you have the right to buy shares in your company. As such, the acquiring company (in most cases) will need to compensate you for this right/value (otherwise you would exercise the right and purchase shares—and then they would need to buyout your shares). Acquirers typically handle this in a couple ways: (1) Buyout your stock options (net of the strike price); or (2) Substitute or assume your stock options for equivalent value in their company.
NOTE: The amount you will receive will depend on a number of factors, include your grants strike price, the buyout price, and buyout terms. For any vested options that are "underwater" (i.e. the buyout price per share is below your option strike price), it does not have any value and they will likely be canceled as well.
Vested restricted stock (RSUs). Vested RSUs are treated very similar to vested stock options. You have vested into the restricted stock, and the acquiring firm in most cases will need to compensate you for it.
Unvested stock options (ISOs or NSOs) and RSUs. This is typically the trickiest one. Unvested options or RSUs, by definition, are unearned and thus have no explicit value. Because of that, the decision for what to do with these is mostly up to the Acquiring Company to decide. We’ve seen lots of different approaches, but the most common are:
Cancel the grant. The Acquiring Company could choose to cancel all, or a portion, of the grants unvested shares/units — functionally providing you with no compensation at all for them.
Assume or substitute the grant. In this scenario, the Acquiring Company would provide you an updated or substitute grant. They could potentially assume the grant (updated to reflect equity in the acquiring company, with a conversion ratio), or they could issue a new substitute grant (again, specific to the acquiring company's equity) with similar terms. The implementation and tax considerations vary depending on the specifics.
Accelerate and/or cash out the grant; either partially or fully. The Acquiring Company could accelerate the grant (i.e. make all unvested shares vested), or opt to provide some form of compensation (cash or shares) for the unvested portion of your grant. Note that an acceleration or cash out could be partial or full.
Unique features (accelerated vesting). In less common cases, stock-comp awards can have what is known as a “single trigger” or “double trigger” feature (or in some cases, a company's stock option plan could require acceleration for all grants in an acquisition). An acceleration requirement means that if certain criteria are met, all unvested shares will immediately vest. If your grant(s) contain this feature, it could materially change the compensation you will receive.
Key Factor 2: Deal Terms and Structure
As noted above, deals are typically paid for in one of three ways (Cash; Stock; Hybrid). The terms and structure of your specific deal will likely impact how the Acquiring Company approaches certain situations (e.g. if the deal is All Cash, then buying out vested grants for cash would be unlikely).
Most Common Outcomes
Each acquisition deal is unique, as are your holdings, vesting, and exercise history (if applicable). That said, to provide some generalized guidance regarding the most common outcomes (while disclaiming that they may not apply to your situation):
| Item | Treatment Details |
|---|---|
Stock | You're paid cash for the shares you own (price is fixed) |
Vested Options/RSUs | Most commonly bought out for cash |
Unvested Options/RSUs | Most commonly not paid for. May be indirectly compensated in other ways (e.g. retention grant in Acquiring Company) |
Tax Impact(s) | Cash paid for shares is likely a "sale" and will trigger capital gains/losses. The buyout of vested options or RSUs is most likely to be treated as income |
Key Decisions, Considerations, and Risks
If the Acquiring Company Is Publicly Traded, You Will Have Liquidity for Your Shares and Should Create a Divestment Plan
Being acquired by a publicly traded company offers the ability to sell shares periodically. The new equity you have in the Acquiring Company likely comprises a material amount of your net worth (especially in All Stock and Hybrid deals). When you have a concentrated position in a publicly traded company, it's important to develop a thoughtful selling plan for your holdings—balancing risk and reward, as well as seeking to minimize the tax impact. For more details see: Creating a Divestment/Selling Plan
Will You Retain Your Job Post-Acquisition?
In most acquisition circumstances, the Acquiring Company is larger, better capitalized, and has more corporate infrastructure. They've likely done a lot of analysis regarding your company's employees, and most likely a portion of them will be duplicative when the deal is closed (especially certain corporate functions like finance, accounting, HR; senior leadership). If you believe that your job is potentially at risk once the deal closes, this should be an important part of your financial planning.
The Acquisition May Not Be Completed, or the Terms May Change
As the saying goes, "it's not over until its over." While it's important to develop a strategic plan once an acquisition is announced, your plan also needs to consider the possibility that the acquisition may get canceled or that the terms of the deal may change.
You May Have an Opportunity to Negotiate With Your New Employer
When your company gets acquired, you're effectively becoming an employee of a new company. While there is a risk that the new company may not retain you (as noted above), you may alternatively be able to use this situation as an opportunity to negotiate with your new employer. For a comprehensive list of items that may be negotiable see: New Employee Negotiation
Your Common Shares May Be Worthless (Due to VC Liquidation Preference)
While an acquisition is a potentially exciting and financially lucrative time as an employee, it's also possible that you may be disappointed. One item that frequently surprises employees (especially if the company is sold for a value near or below the more recent VC raise price) is the impact of VC liquidation preference. The very high level is that when VCs invest in a company, the preferred stock they get generally has special terms that stipulate that they get paid back 100% of their investment first before anyone else sees a dime. In mediocre exit scenarios, it can have a very large impact on how much money an employee (with common shares) receives. For more details see: [FAQ] What is VC Liquidation Preference? And How Can It Impact My Stock-Comp?
Strategic Tax Planning
With any liquidity event, a large number of tax planning opportunities exist. We've dedicated a section of this knowledge base site to detail 50+ tax strategies that you may consider, and highly recommend that you visit it as you develop your holistic plan and tax strategy.
Stock Comp Tax Planning Guide: 50+ Tax Strategies
Key Acquisition Types; Structures; Payment Methods
Hundreds of books have been written on this topic. For all the finer points we will defer to those docs as much more detailed sources of material. But for a technology employee going through an acquisition, high-level items that may be helpful to understand include:
Acquisitions Are Paid For In 3 General Ways
Acquisitions, by definition, mean the Acquiring company is purchasing the outstanding shares of the Acquired/target company. Generally, the structure of these deals will be one of the following:
All Cash. In this case, the acquiring firm is utilizing cash on its balance sheet to purchase 100% of your company. The value you will receive (per share) if/when the acquisition is completed is set and should not change.
Acquisitions Are Most Frequently 100% Purchases (But Not Always)
In most acquisition situations (and especially business-to-business acquisition) the Acquiring company will purchase 100% of the outstanding shares.
However, in certain situations (and more commonly when the acquiring entity is a Private Equity firm), the acquiring firm may structure the transaction to acquire less than 100% ownership (though typically a minimum of 51%). To achieve the sub-100% ownership percentage, the acquirer may purchase outstanding shares from existing shareholders and/or invest new capital into the business.
Less Common Types of Acquisitions/Transactions May Also Occur
Beyond the common acquisition types detailed above, there are a few less common types of transactions that can/do also take place. Some of these include:
An acquihire refers to the acquisition of a company primarily for the skills, talent, and expertise of its staff, rather than for its products, customers, or revenues. They generally occur at earlier stage companies and lower company valuations. And while not required, acquihires are more common to occur at a company who is struggling (e.g. it's a better alternative to shutting down).
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