When your company undergoes a merger or acquisition, the future of your outstanding stock grants—whether stock options, restricted stock, or restricted stock units (RSUs)—can become uncertain. Understanding the potential outcomes for these equity awards is essential to protect your financial interests. Here are five important things to consider:

1. The Fate of Vested and Unvested Grants

The treatment of your vested and unvested stock grants during a merger or acquisition is often complex and subject to various factors. The deal’s terms, negotiations between the companies involved, and the provisions in your company’s stock plan all play a role. Additionally, your individual grant agreement may include specific clauses that determine what happens to your equity awards. It’s crucial to review these documents to understand your rights and potential outcomes.

For instance, some agreements may stipulate that unvested grants are forfeited if the company is acquired, while others may offer protections such as accelerated vesting or conversion to new company stock. The specifics will depend on the deal structure and the agreements in place.

2. Accelerated Vesting and Potential Triggers

In certain scenarios, the terms of your individual stock grant may provide for accelerated vesting of unvested grants with time-based vesting. This can occur when specific conditions are met, such as the closing of the deal. However, it’s important to note that in many cases, a second event or trigger, such as involuntary job loss, must occur for the vesting to accelerate fully.

This means that while the merger or acquisition might trigger some acceleration, the complete vesting of your grants could hinge on additional factors. Understanding these potential triggers is crucial, as they directly impact the number of shares you ultimately receive.

3. Conversion, Cash-Out, or Combination Approaches

Unless your stock grants are cashed out by the acquiring company, your outstanding grants will typically convert into grants in the new company. The most common approach involves rolling over or converting your existing grants into a structure that mirrors their original terms but applies to the new company’s stock. This ensures continuity of your equity awards, albeit under a new corporate entity.

Alternatively, the buyer may opt to buy out your outstanding grants, particularly stock options, for cash. In such cases, it’s important to be aware that you may need to exercise your options before the transaction closes to avoid forfeiture. A third approach could involve a combination of stock and cash, especially if your company becomes a subsidiary of the buyer. Each of these outcomes has different implications for your financial situation, so it’s important to understand the specifics of the deal.

4. Vesting Schedules and Adjustments

Typically, the vesting schedule for unvested grants will carry over to the new company, maintaining the timeline initially set by your original grant. The exchange ratio used in the merger or acquisition—determining how many shares of the new company you receive for each share of your company’s stock—will also apply to your stock grants.

For stock options, the exercise price will usually be adjusted to preserve the total value of your options. This adjustment ensures that the difference between your exercise price and the stock price offered by the buyer (the “spread”) remains consistent, maintaining the value of your equity awards. Understanding these adjustments is key to evaluating the true impact of the merger or acquisition on your stock grants.

5. Tax Implications

In many cases, if you’re not receiving cash in exchange for your grants or vested company stock, the transaction itself may be tax-free. However, it’s crucial to examine the specific tax implications of the deal, particularly if your options were originally granted as incentive stock options (ISOs). Depending on the deal structure, ISOs may lose their favorable tax status and convert to non-qualified stock options (NSOs), which have different tax consequences.

Additionally, any acceleration of vesting for restricted stock or RSUs, or the exercise of non-qualified stock options, will typically trigger ordinary income tax. It’s important to consult with a tax advisor to fully understand how the merger or acquisition will impact your tax situation.

The Bottom Line

Navigating the complexities of stock grants during a company merger or acquisition can be challenging. By understanding the potential outcomes for your equity awards and the factors that influence them, you can make informed decisions and better protect your financial future. Always consult with a financial advisor or legal professional to ensure that you fully understand your rights and options in these scenarios.