what happens to a stock when a company goes private
The main goal of nigh VC-backed companies is an exit. At that place are essentially 2 ways to achieve this goal: go public or get acquired by another visitor. Last week nosotros discussed in detail what happens to employee shares and stock options when a visitor goes public. This mail will encompass the more than frequent exit event – an acquisition.
The Chiliad&A
While the dream for many startups is to become public, in reality the Yard&A (mergers and acquisitions) route is a much more common ane. According to CB Insights, only 3% of exits in 2015-2016 were IPOs (initial public offerings), while the rest (about 6,700 out of half dozen,900 exits) were through a merger or an acquisition.
Whether information technology'south a directly competitor, a large visitor that wants to expand online, or the corporate incumbent your company was trying to defeat, the possibility that one of these companies volition acquire the startup yous piece of work for is your best shot for an exit.
But what happens to your shares and options when that happens?
If you want a quick refresher on options nuts, nosotros e'er recommend starting hither.
Stock vs. Cash Chiliad&A
When company A (we'll call it Acquirer) acquires your company (we'll phone call it Target), it tin pay for the Target's shares in two means – with cash or with Acquirer shares. The conquering transaction tin can be structured as a full cash transaction, a full stock transaction, or a mixed stock and greenbacks transaction. The form of compensation (cash or stock) can take a significant touch on the value that Target's founders, investors, and employees get from the transaction, and more importantly, how fast they tin plough that value into greenbacks.
While xx years agone, most tech acquisitions were stock acquisitions, in recent years, almost 90% of tech Grand&A transactions were cash ones. We'll do our best to cover both options as simply as possible.
Vested Options That Have Been Exercised, aka Shares
If yous already own shares, it's pretty simple. Y'all will get proceeds in either cash or Acquirer stock based on how many mutual shares yous ain.
While this is not the topic of this post, it'due south of import to notation that your gain may not necessarily reflect your buying pct in Target. Significant, if Target was sold for $100 one thousand thousand and your shares stand for 0.i% buying, you may not necessarily get $100,000. The reason for that is that venture capital investors typically accept preferences and priorities that can bring that number down (we'll cover that in another postal service). If your company is sold for a very high price compared with how much information technology raised from such investors, information technology's possible that you'll get your "full" $100k, but in other scenarios, you may get less. In other words, the price per-preferred-share (what investors get) and the toll-per-common-share (what you get) may exist dramatically different in an acquisition.
Going back our topic, allow'south assume that you ain 10,000 shares and the cost-per-share that common shareholders become in the acquisition is $10, you lot will get either $100,000 in cash (pre-tax) or in Acquirer stock.
Cash is uncomplicated, only what about stock? If Acquirer is a public company, you'll exist able to sell the shares and turn them into cash immediately. You can also cull to concord them for as long equally y'all'd like if you believe that they will continue to capeesh. If Acquirer is a individual company, things go tricky and you'll have to understand the transferability of Acquirer shares. In some cases, you'll be able to sell them, but it could very well be that your position will exist unchanged from earlier the acquisition. That means yous'll still be in "wait-for-exit" mode, simply now you'll accept Acquirer shares instead of Target shares.
Vested Options That Accept Not Been Exercised
In most cases, employees will preserve the value of their options when their company gets acquired.
If it'due south a greenbacks bargain, they will typically get "cashed-out", which means they volition receive cash for the value that represents the difference betwixt the price-per-share that common shareholders go far the acquisition and their strike price. This is essentially similar exercising the option and selling the share immediately.
Going back to our example in a higher place, if the cost-per-share common shareholders get is $10, and you lot have 5,000 vested options that have notwithstanding to be exercised at a strike price of $1 per share, your proceeds volition be $45,000 [($10-$1)*5,000]. If the toll-per-share is lower than the strike toll, your options are basically worthless.
If information technology'southward a stock bargain, your vested options in Target volition almost likely convert to Acquirer stock options using a ratio and strike price that preserve their value (if greater than null). At that bespeak, you'll have to decide whether to practice them or wait. If the Acquirer is public, you can exercise your options and sell the shares immediately. If the Acquirer is private, you'll probably take a more than difficult fourth dimension liquidating the shares post-exercise.
Unvested Options
This one is a trivial trickier. Acquirer may choose to replace your Target unvested options with new Acquirer options that requite y'all the same value, but it could too offer you lot a completely dissimilar compensation parcel that may non fifty-fifty include stock options.
In some cases, an acquisition will trigger vesting dispatch for some employees. That means that a portion or all of your unvested options will vest one time an acquisition is completed. Dispatch is typically a right held for executives that have such clause in their compensation plan, but it can also be applied to others in the organization if the acquisition agreement indicates then.
Good Luck!
While you lot tin can't actually impact whether your visitor is caused for cash or stock, the one thing you can do is build peachy companies and increase the probability that all stakeholders, including employees, will become what they've earned on an exit.
Skilful luck!
[Note: we did not embrace any M&A taxation consequences in this post, but we volition cover this important topic in a later postal service]
All information provided herein is for informational purposes only and should not exist relied upon to make an investment conclusion and does non intend to brand an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is information technology to be relied on in making an investment or other determination. Readers are recommended to consult with a financial adviser, chaser, auditor, and any other professional that tin can assistance you empathise and appraise the risks associated with whatsoever investment opportunity. Individual investments are highly illiquid and are not suitable for all investors. Securities on the EquityBee platform are offered through North Capital Private Securities, member FINRA/SIPC.
Source: https://blog.equitybee.com/what-happens-to-your-stock-options-and-shares-when-the-company-gets-acquired/
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