Employee Stock Options in a Company Buyout: What You Need to Know
When a company is bought out, the fate of stock options held by employees can vary widely depending on the language of the stock option grant and the terms of the acquisition agreement. Understanding what happens to these options is crucial for both employees and management.
Understanding Stock Option Grants and Vesting
What Does Your Stock Option Grant Say? This is the first and most critical question. The specific language in your stock option grant will determine the outcome when a company is bought out. Generally, stock options vesting accelerate to the point where all of your options become vested. If the options are "in the money," they will be exercised and then sold, typically in a single transaction, resulting in a check being issued to you.
The Conversion and Distribution Process
Normally, your vested options are converted into shares in the acquiring company. The conversion rate is typically established within the acquisition agreement. The exact terms and conditions of the acquisition agreement will dictate the price and number of shares you receive.
Vesting and Motivation: Key Considerations
How vesting is treated under a buyout can significantly impact employee motivation and retention. An investor might prefer to maintain the current vesting schedule with equivalent stock options in the acquiring company. This helps to tether employees to the new company. On the other extreme, the option plan may call for automatic vesting of all outstanding options upon a change of control. While this can lead to substantial financial gains for employees, it may also reduce their motivation to support the new company, especially if the acquired company has a high valuation. This scenario is rare in companies that have raised significant capital from institutional investors.
Double Trigger Vesting: The founder and key management might be granted "double trigger" vesting. This means that one-half of the existing unvested options will automatically vest at the time of closing. The rationale behind this is that senior management had a responsibility to create a liquidity event for the investors, and they deserve compensation when this occurs.
The remaining unvested options will vest according to the original plan. Additionally, if such an individual is terminated without cause or leaves with good reason, the remaining unvested options will automatically vest. This second trigger is justified by the necessity for senior management to facilitate the transition to the acquiring company, such as introducing the acquirer’s management team to key customers to maintain their business relationships.
Managing Redundant Positions
In many cases, the acquisition results in redundancy, particularly at the executive level. For example, the acquirer may already have a sales force that calls on the same customer base. In such scenarios, roles like the VP of Sales might not be required beyond the transition period. It is essential for employees to understand the potential implications of the buyout for their roles and benefits.
Conclusion: The terms of your stock option grant and the details of the acquisition agreement are crucial in determining what happens to your stock options in a buyout. Understanding these terms can help you navigate the changes and make informed decisions about your future within the company or after the acquisition.