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Merger and Acquisition Effects on Stock Options
Due to the magnitude of merger and acquisition (M&A) activity in both the private and public markets, it is important for founders, executives, and employees to all consider the effect a consolidation could have on stock options.
In some cases, treatment may be found in the individual’s grant package in a section regarding change in control, or qualifying events. However, there may be a few general outcomes for different types of equity depending on the structure of the transaction.
| EXERCISED SHARE | UNEXERCISED VESTED OPTIONS |
UNEXERCISED UNVESTED OPTIONS |
|
| CASH-OUT | An acquirer usually pays cash consideration for stock in the acquired. | An acquirer may pay cash consideration net of the strike price for vested options in the acquired. This consideration may be subject to holdbacks. |
An acquirer may pay cash consideration net of the strike price for unvested options in the acquired. This consideration may be subject to restrictions. |
| ASSUMPTION, OR SUBSTITUTION | An acquirer may pay equity consideration in the acquirer for stock in the market. | The acquirer may assume or substitute the acquirer’s equity net of the strike price for vested options in the acquired. This substitute equity may be subject to holdbacks. |
The acquirer may assume or substitute the acquirer’s equity net of the strike price for unvested options in the acquired. This substitute equity may be subject to restrictions. |
| ACCELERATION | Should not result in any change. | The acquirer may allow the chance to exercise options during or after the M&A deal closes. |
The acquirer may accelerate the vesting of options and allow the chance to exercise options during or after the M&A deal closes. |
| CANCELLATION | Should not result in any change. | An acquirer may cancel underwater vested options in the acquired. |
An acquirer may cancel unvested options in the acquired whether underwater or not. |
Although it’s important to be aware of some of the possible outcomes of stock options in a business combination, or a potential exit like an IPO, the best time to plan is when an individual first joins a company or is granted an equity award.
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Contact OCSC Platinum Sponsor Withum to learn more about their services. For Technology and Emerging Growth Services contact Allen Goh, Technology & Emerging Growth Services West Coast Team Leader - allen.goh@withum.com, Matt Greco, Marketing – mgreco@withum.com, or Brenna Liana, Marketing - aliana@withum.com and learn more at https://www.withum.com/industries/technology-services/ For Life Sciences companies, contact Taryn Bostjancic, Life Sciences Practice Leader - tbostjancic@withum.com and learn more at https://www.withum.com/industries/life-sciences/
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