Executive Compensation When a Public Company Goes Private

By Katy McDonald, CFP® | Apr 06, 2024 |

If you are in an organization shifting from public to private ownership, it’s easy to feel disorientated. You are probably still going to the same place of work; your team looks the same; your Teams and Slack channels look no different. However, change is afoot. Public company to private company compensation questions are front and center. 

Vested stock options

For many executives, public company to private company compensation questions start with equity. Specific entitlements under your equity compensation agreement grant you the right to purchase company stock at a predetermined price. In a take-private scenario, your employer can handle vested stock options in three ways. 

  • The acquiring company might opt to cash out your options. This will provide a payout based on the exercise price and negotiated terms. However, be cautious, as cashing out at closing can result in significant payroll taxes.  
  • The acquiring company may assume or substitute your stock options with its shares. While this offers the chance to purchase shares of the private entity, it may pose challenges for future sales and tax returns. 
  • If your vested stock options are underwater (with an exercise price exceeding the current market value), the acquirer might cancel them without payout or provide a nominal sum. Understanding these potential outcomes is crucial for navigating equity transitions in a private company context. 

Unvested stock options

The value of unvested stock ties many employees to their current employer. The value of that unvested stock and a wish to stick around to see them vested can quantify your desire to stay with the newly private company. However, if the terms around the unvested stock change, so does the value—and potentially your interest in staying. The acquiring and selling company usually determines the fate of unvested stock. Here are common scenarios: 

  • Acceleration of Vesting. These equity instruments become fully vested, allowing employees to realize their value sooner than planned. 
  • Conversion or Cash-Out. The acquiring company might choose to convert unvested stock options or RSUs into its equity instruments or offer a cash payout equivalent to the value of the unvested awards. The specifics of this conversion or cash-out will depend on the negotiated terms between the companies. 
  • Continuation of Existing Terms. The acquiring company may honor the vesting schedules and terms of unvested stock options and RSUs. Employees would then continue to vest by the original terms under the new ownership. 
  • Cancellation without Payout. Unvested stock options and RSUs might be canceled without payout if the acquiring company decides not to assume or substitute these awards. This can lead to a loss of potential future value for employees. 

Base salary and bonus structure

Venture capital firms often bring distinct policies on executive compensation. By proactively assessing these changes, you will be set to make more informed decisions about your financial and professional future. Start with base salary, but don’t end there.  

Check to see if your bonus structure aligns with new performance metrics. If NPS was the measure of success in the past, but operational efficiency is the measure of success in the future, update your OKRs accordingly. Align your efforts with the revised metrics — maximizing your bonus potential. Additionally, check to see if the acquiring company is introducing new long-term incentive plans.  

Dig into proposed changes to benefits structures, too. I worked with a client who had accrued eight weeks of vacation at a company over ten years. As a public company, he had the option of continuing to carry forward unused vacation time, and if he were ever to leave, he could cash out the vacation. When his company went private, it cut the carry-over to one week per year, and he was told to use his accrued eight weeks or lose it. (Reader, he used it.) 

Performance metrics and targets

New performance metrics impact your compensation package, shape the culture, and drive cross-functional alignment. Questions about “values” can take time to answer—they get answered as new initiatives take flight or old initiatives sunset. However, performance metrics rolled out early give you an indication of priorities. A private equity buyout also brings a culture different from a management buyout.  

Understand the expectations of a venture capital (VC) acquisition for its company portfolio. VC companies scale by applying their playbook to acquire, grow, and sell businesses. Understanding this playbook helps demonstrate your alignment with the VC firm’s vision and goals.  

Employment contract and terms

Revisit your employment contract and scrutinize any changes to the terms post-acquisition. Don’t presume the acquiring company shares your understanding of termination clauses, severance packages, or change of control provisions. Trust but verify.  

Legal and compliance

Ensure your compensation package aligns with legal requirements and regulations. You want to ensure that what is being offered complies—reducing the risk of legal complications. This diligence allows you to navigate post-acquisition changes with assurance and mitigates the risk of non-compliance — it’s your opportunity to see and react to (legal) red flags. 

As with all life changes, timing is important when considering your options after a company goes private. Knowing the specifics of this transition period is crucial for your preparedness. It allows you to anticipate adjustments and plan accordingly, ensuring a smooth adaptation to any modifications in your compensation.  

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