Stock Option Strategies in M&A: What You Need to Know
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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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