Your vested options may be handled in any of the following ways, depending on the deal's terms and any limits in your stock plan (see a related FAQ for the treatment of unvested stock grants).
- They can be rolled over into options of the acquirer according to an exchange ratio of your company's options for those of the acquirer, in a way that preserves your option spread. The majority of M&A transactions use this structure to convert the seller's stock options into those of the combined or acquired company. For details on the conversion calculation, see a related FAQ.
- Alternatively, the buyer can assume your company's stock plan instead of converting your options into options in its plan. The outcome to you at exercise is similar. The technical differences between assuming as opposed to converting options affects the buyer. When the seller's stock plan is assumed (and then often registered by the buyer with the SEC), the buyer does not need to use up the limited pool of options approved by shareholders under its stock plan, and the seller's plan and its outstanding options are not immediately canceled.
- They can be canceled for a cash payment, often at the deal's closing. (For the treatment of underwater stock options, see the relevant FAQ.) The buyer can also pay cash directly for the options. Sometimes the options can remain outstanding after the closing while the spread is adjusted into the right to receive $X in cash upon exercise (usually a fixed amount equal to the amount per share that shareholders receive), or the cash payments follow a vesting schedule similar to that of your stock options.
Example: In Amazon's purchase of Whole Foods Market (see pages 2 and 44 of the Whole Foods proxy statement), all vested and unvested grants of stock options and SARs are canceled and converted into the right to receive cash for the amount of the merger consideration over the exercise price.
- They can be left intact if your company maintains its existence as a subsidiary of a new parent.
Depending on how the acquisition is structured, sometimes companies provide a choice: cashing out your options or swapping them for new options; cashing out only options below a certain value and rolling over the rest; or issuing a combination of cash and stock. The timing, structure, and payout can also vary if there is an earnout. Study your stock plan, your grant agreement, and the terms of the deal. Many stock plans give companies the discretion, without the participant's consent, to approve the assumption, termination, and/or cashout of options, including the cancellation of underwater options without payment. For a discussion of the tax treatment, see a related FAQ and article.
Alert: Under many stock plans, vested options that are not converted or assumed by the buyer, or are treated in some other way by the companies in the deal, often terminate at the closing, at a specified number of days after the closing, or at your company's liquidation. You need to exercise these options before such events occur, in accordance with your stock plan and company procedures, to avoid the forfeiture of the options.
For the treatment of restricted stock/RSUs, see a related FAQ.