FromErin, Paysa’s Equity and Compensation Expert
Most companies issues stock options from under a stock plan. The stock plan and/or your grant agreement control what happens to your options in either scenario. Usually, nothing changes to your option grant when the company has its IPO other than allowing you to sell your vested shares (after any mandatory holding periods have lapsed).
Similarly, you may be able to exercise the last ¼ of your option shares using the proceeds of an immediate stock sale on the open market, if you’re tight on cash.
Acquisitions are trickier. The stock plan may detail exactly what happens to the unvested shares.
More likely, though, the company will allow the board to make the final decision at the time of the transaction.
This allows the company full flexibility to negotiate the best treatment of the options with the acquiring company. Here are a few scenarios that the parties might agree to:
- If the company is the surviving corporation in a merger – the option continues vesting as normal;
- The parent buyer or surviving corporation may assume the option, allowing continued vesting Assumption of the Option by the surviving corporation or its parent in a manner that complies with Code Section 424(a) (whether or not the Option is an ISO);
- Your option may be swapped for an option from the parent buyer or surviving corporation;
- Cancellation of the option and a payment from transaction proceeds for all vested shares.
- Cancellation of the option without any payment, but giving the option holder time to exercise any vested shares.
The short story is a company usually has the power to completely discard your unvested options in the course of an acquisition.
So, what can you do to protect yourself?
If you are a key employee, chances are you won’t be fired in connection with an acquisition and since you’ll still need incentive to keep working, your option shares will likely continue in some capacity. If that’s not your situation, or if you want to protect yourself anyway, you may try to negotiate acceleration of vesting in connection with your option grant.
Acceleration is the speeding up of vesting for a portion or all of your unvested shares upon the happening of a specified event.
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There are two standard types of acceleration: “Single trigger” and “Double trigger.”
Single Trigger acceleration is when all or part of your unvested shares vest upon the happening of a single event – usually a “change in control” or an “involuntary termination.”
Double trigger acceleration requires that both events occur, first a “change of control” followed by an “involuntary termination” within 12 months.
The definitions for “change of control” and “involuntary termination” will be laid out in your option paperwork or in the company’s stock plan.
A “change of control” is a sale or merger of the company; and
An “involuntary termination” means a termination for something other than “cause,” such as a failure to perform your duties, violation of the law or company policy, breach of your contract, etc., or if you resign for “good reason,” such as a drastic reduction in your duties and pay or moving your principal workplace more than 30 miles from your home.
To learn more about acceleration of vesting or other equity related topics, check out Paysa’s handy equity compensation guide!