Acquisition, employee stock options are typically cashed out, converted into the acquirer’s equity, or canceled depending on deal terms, vesting status, and whether options are in-the-money or underwater. Outcomes differ for vested versus unvested options, and tax treatment varies for NSOs, ISOs, and RSUs based on whether consideration is cash, stock, or mixed.
Why acquisitions change options
Acquisitions redefine capital structure and equity plans, so option treatment must align with deal consideration (cash, stock, or mixed) and the acquirer’s retention strategy. The merger agreement governs whether options are paid out, assumed, substituted, or terminated across award types and vesting statuses.
Core outcomes for options
- Cash-out: Vested in-the-money options are paid the spread (deal price minus strike), often at closing, functioning like a bonus payout for employees.
- Assumption/substitution: Options convert into acquirer options using an exchange ratio that preserves intrinsic value and vesting schedules where specified.
- Cancellation: Underwater or unvested options can be canceled with no payout if not protected by plan terms or negotiation.
Vested vs unvested options
- Vested options: Frequently cashed out or converted into acquirer options; some deals allow or require exercise before closing under plan rules.
- Unvested options: May be assumed with continued vesting, converted to new grants, accelerated (single or double trigger), or canceled depending on retention plans and cost constraints.
RSUs, ESPP, SARs, and exercised shares
- RSUs: Often assumed with continued vesting, cashed out at deal price, or accelerated if triggers apply; tax is typically ordinary income when paid in cash.
- ESPP shares: Already-owned shares are treated like other shareholders; ongoing purchase periods may be shortened and contributions returned or used at closing.
- SARs: Usually settled for cash or acquirer equity based on appreciation at deal price, similar to options’ spread value realization.
- Exercised shares: Holders are shareholders and receive the same consideration as other holders, in cash, stock, or a mix under the merger terms.
Deal structure and consideration
- All-cash deals: Options typically cash-settle for intrinsic value; unvested may be canceled or paid if accelerated by plan or negotiation.
- All-stock deals: Options and RSUs often roll into acquirer equity with adjusted counts and exercise prices to maintain value; generally tax-deferred until sale.
- Mixed consideration: Some portion pays out in cash while the remainder converts to acquirer equity; treatment can differ by grant type and vesting.
Acceleration mechanics
- Single-trigger: Vesting accelerates on change in control, providing payout or conversion for previously unvested awards upon closing.
- Double-trigger: Vesting accelerates only if there is a change in control followed by a qualifying termination (e.g., without cause) within a set window.
Underwater options
Underwater options (strike above deal price) are commonly canceled with no consideration unless replaced by new grants for retention, since they have no intrinsic value at the transaction price. Some acquirers issue fresh equity to align incentives post-close, particularly in talent-driven takeovers.
Taxes: NSO vs ISO vs RSU
- NSOs: Cash-outs are generally taxed as ordinary income and subject to payroll tax; timing and withholding apply at payment.
- ISOs: If cashed out as unexercised options, treatment can resemble option cancellation with payroll tax; exercising shortly before close can change tax characterization but requires compliance with blackout rules and careful planning.
- RSUs: Cash settlement triggers ordinary income at vest/payment; stock-for-stock assumptions defer taxation until vest and share delivery, then ordinary income.
Performance-vesting awards
Performance-vesting awards might be treated based on actual performance to date, deemed target or prorated, or converted into time-vesting awards post-close, as negotiated in the merger agreement. Clear methodologies are often negotiated early to avoid post-close disputes and ensure ASC 718 compliance.
Common employee scenarios
- Startup employee with vested options in a cash sale: Receives spread in cash; unvested may be canceled unless accelerated; NSOs taxed as ordinary income.
- Public company with stock-for-stock merger: Options convert using the exchange ratio; vesting continues; double-trigger protection may apply if later terminated.
- Down-round acquisition: Underwater options canceled; acquirer may issue new grants for retention at post-deal fair market value.
Practical steps to take
- Read grant agreements and plan documents for change-in-control, acceleration, and treatment clauses; these control outcomes alongside merger terms.
- Request an Equity Impact Summary detailing counts, strike prices, vested status, tax classification, and expected treatment at close.
- Model taxes and net proceeds across scenarios (exercise before close, cash-out, rollover), especially for ISOs with AMT considerations and NSO withholding.
- Watch blackouts and trading restrictions; violating compliance windows can void intended tax strategies or trigger penalties.
- Negotiate protections: double-trigger acceleration, replacement grants, or guaranteed cash treatment for critical roles and retention.
Investor vs employee perspective
Shareholders focus on headline consideration per share and timing, while employees with options care about spread preservation, vesting continuity, and tax efficiency. Acquirers balance dilution, retention needs, and P&L impacts from compensation expense when deciding to assume or cash out awards.
Bottom line
What happens to stock options when a company is acquired generally falls into three buckets: cash-out, conversion to acquirer equity, or cancellation, with different results for vested and unvested awards and significant tax differences by grant type. To navigate what happens to stock options when a company is acquired, employees should review plan documents, confirm acceleration rights, model taxes, and coordinate timing to optimize net outcomes.
FAQs
No; some are converted, and underwater or unvested awards can be canceled unless protected by plan terms or negotiated acceleration.
Yes, if single-trigger acceleration applies or if the acquirer agrees to accelerate; otherwise they may be assumed or canceled.
Typically tax-deferred for options/RSUs until later exercise, vest, or sale; cash portions are taxable when paid.
It depends on deal type, blackout rules, AMT, and whether unexercised ISOs will be canceled; seek tax advice and confirm timelines.
Those options are underwater and often canceled; acquirers may issue new grants for retention post-close.
Disclaimer
This article is for educational purposes only and isn’t financial, accounting, tax, or legal advice; consult a qualified professional for your situation. No advisor‑client relationship is created, and the author isn’t liable for losses from reliance on this content. Past performance isn’t indicative of future results; use information at your own risk. Affiliate or third‑party references may appear and don’t imply endorsement.
