How to Navigate a Corporate Acquisition as an Employee

By Chris Moreton & Zach Smith, CFP® | Dec 21, 2022 |

Mergers and acquisitions can be complicated, catalytic moments for your career and financial future. Learning that your company is being acquired can result in increased excitement or stress – or a combination of both – as you anticipate the potential implications of the deal and what the news might mean for your life.

Please note that the implications of an acquisition vary case by case. This article will outline the most general scenarios, but it’ll be important for your personal situation that you can understand the specifics of your company’s acquisition before you make any financial decisions.

What kind of deal was negotiated?

How this acquisition affects your personal financial situation largely depends on whether it’s a cash purchase, stock purchase, or a combination of the two. The first step in projecting the impact is understanding which type of acquisition your company is going through.

  • Cash Purchase – The acquired company is purchased for cash that is distributed to shareholders at a pre-determined valuation. Typically, shareholders only receive cash for their vested options. Unvested shares can either be accelerated – meaning they become vested and then purchased – or the acquiring company can choose to cancel them.
    • Amazon’s acquisition of Whole Foods is an example of an all-cash deal.
  • Stock Purchase – Equity in the acquired company is swapped for equity in the acquiring company at an agreed-upon ratio. Depending on if the acquired company is public or private, exercised and vested holdings (shares, options, and restricted stock units (RSUs)) may be converted to stock in the new company. Unvested holdings may be converted to unvested holdings in the new company, but they might be subject to a revised vesting schedule.
    • Examples of stock purchase acquisitions include Uber’s purchase of Postmates.
  • Cash and Stock Purchase – A portion of shareholder equity is bought for cash, and what remains is converted to stock in the acquiring company. In addition to converting your holdings, the employer may offer a one-time bonus and retention pay to keep valued employees.
    • Salesforce used the cash and stock method to acquire Slack in 2021.

How will your existing equity be affected?

There are several types of equity that companies can offer their employees, but we will focus on two of the most common.

  • Employee Stock Options – Employees receive shares of the company that are subject to a vesting schedule and can be purchased at a fixed price (the strike price). The most common versions are incentive stock options (ISOs) or non-qualified stock options (NSOs). ISOs are only awarded to full-time employees and NSOs can be awarded to both employees and vendors or partners who aren’t on the company payroll. With both forms of stock options, employees generally have to exercise their right to purchase options by putting their own savings up to buy the stock.
    • If your company was acquired using a stock purchase or a cash and stock purchase, your ISOs and NSOs will be affected regardless of vesting status.
      • Exercised Shares – While there’s no hard-and-fast rule, you should expect your exercised shares to either be paid out in cash or converted to common shares of the acquiring company. The benefit of exercising them is locking in your cost basis.
      • Vested Options – There are two common possibilities for vested shares. Either the acquiring company applies an acceleration clause to your shares, which speeds up your vesting schedule, or they will cash out your shares net of the strike price.
      • Unvested Options – Depending on the structure of the deal, there are three possibilities for unvested options. The holdings could be canceled, they might be converted to cash and paid out over time, or they could be converted to the acquiring company stock and subject to a new vesting schedule.
      • Restricted Stock Options (RSUs) – This form of equity is “restricted” because the shares are subject to a vesting schedule that can be based on length of employment or performance metrics, and there are other ways a company might limit your ability to transfer or sell.

If your company is public and you’ve vested and held RSUs, the acquiring company could purchase them for cash, a taxable event resulting in either short-term or long-term capital gains, depending on how long you’ve held the RSUs. In the event your shares are being exchanged for equity in the acquiring company, your equity would be converted to new the company’s stock at a fixed ratio. The value of your holdings could either increase or decrease, dependent on the ratio and values of the stock for both companies.

There are two types of vesting schedules that can be assigned to RSUs.

  • Single-Trigger – This is the most common type of schedule for equity offered by public companies, and they only have one requirement for the shares to be considered fully vested – the completion of the vesting timeline (over four years, with 1-year cliff, for example). Employees would be responsible for paying taxes as the vesting timeline is satisfied.
  • Double-Trigger – This vesting schedule is the preference for RSUs in private companies. There are two requirements that shares must meet to be fully vested – the completion of the vesting timeline and a liquidity event (technically known as a change of control event, but generally acquisition or IPO).

While this additional requirement may seem restrictive, it’s actually to the employee’s advantage. When an RSU vests, it’s considered a taxable event, meaning the total vested value will be taxed as ordinary income on that date. Shares in a public company can be sold to cover the tax bill, but RSUs in a private company can’t be sold, so employees are forced to use other funds to pay what’s owed. The “double-trigger” vesting schedule keeps employees from ending up in this tax bind.

The Ups and Downs of Going Public

If your company is private and the acquiring company is public, the prospect of working for a public corporation can be exciting. It’s important to acknowledge, however, that the transition can have challenging impacts on the workplace environment, the pace and priorities of the business, and your mental health.

Before the transition to public, the value of your equity seemed set in stone, and may have experienced a steady increase as the company raised more money at higher and higher valuations. The only factors at play were the value of your shares, and the only uncertainties you had to manage were whether you’d exercise your options and whether the company would go public so the shares would become real.

Now, the value is dictated by the stock market and all the factors it takes into consideration. The sudden unpredictability of your previously secure asset can cause anxiety and fear, especially for those who have never had a large sum of money before. Furthermore, you must now consider the dangers of having an overly concentrated portfolio – it can be risky having your net worth tied up in your employer’s stock with few or no alternative investments to diversify and soften the blow if the stock price falls. Even if your company is continuing to grow and in a strong position, you may still find the stock price down as market conditions, which are out of your company’s control, tend to impact the stock price.

To be mentally, emotionally, and strategically prepared for how to navigate the volatility of your employer’s stock and the market, it’s imperative that you have an investment philosophy you’re committed to. A well-constructed plan will include specified thresholds for when you’re willing to sell so you’re not tempted to act based on alarming or enticing market activity. It’s always a great idea to align yourself with an advisor who can both help define your investment philosophy and hold you accountable to it.

Layoffs & Severance Packages

When acquisitions are announced, it’s common for employees in the acquired company to feel excited. Unfortunately, the grim reality of these corporate transactions is they don’t always benefit everyone.

Layoffs may be required to remove redundant positions, streamline operations, and help pay for the merger. Senior management isn’t immune, either. There are plenty of acquisitions throughout history that resulted in the termination of CEOs and other executive positions. Who’s affected all depends on the terms of the transaction, as does the generosity of the severance packages.

The best-case scenario for those who are laid off is to leave the company with a severance package. While not required by law, they are a common parting gesture and something that’s come to be viewed as an acquisition expectation. Typical severance packages will include continuation of insurance benefits, job search assistance, and continued pay for a set period beyond your termination date. If you have the ability during the deal structure, including provisions for accelerated vesting of equity can ensure that those who are let go during a merger are taken care of financially.

If you find yourself in this situation, we’d recommend reviewing our in-depth article to navigating an unexpected layoff.

Seek Guidance from a Financial Advisor

The purpose of this article is to provide insight into the types of acquisitions and the general implications of each. What we didn’t address was the potential tax consequences of each transaction type and the tax considerations employees should be aware of. As you might imagine, the tax-specific implications can be equally, if not more, complicated than what we’ve covered thus far.

Working with an advisory team that has experience helping individuals through these types of events can make a huge difference, both financially and emotionally.

Let’s talk

Whether you have a specific question, or you’re interested in learning more about how our approach can be tailored to your situation, we’d love to hear from you.