An acquisition is a milestone moment for both companies involved. But for founders and employees alike, these deals are much more than just a catchy headline and a big number. The financial outcome for individuals can vary widely, and may mean the difference between a meaningful windfall and a major disappointment.
Payouts depend on several factors, including the type of equity holdings, role within the company, and the specific terms of the deal. Let’s break down what happens to your equity in an acquisition, and the key elements that can impact your final take-home amount.
Business shakeups may impact employees’ salary, job security, and stock options. Whether the move was an acquisition or a merger can have varied impacts on employees and their equity.
While top executives may be negotiating retention packages or accelerated vesting schedules, rank-and-file employees are often left wondering what happens to their unvested options, or whether their hard-earned equity will still be worth anything once the deal closes.
To start, let’s define acquisitions and mergers.
When two companies of similar size combine to form a new entity, they’re entering into a merger. These are usually billed as “mergers of equals,” though in reality, one party typically ends up taking a leadership role.
An acquisition, on the other hand, occurs when one company takes over another — hence its alternative name, a takeover. The acquired company ceases to exist, and the acquiring company becomes the sole owner. Takeovers can be friendly, where both sides see strategic benefit, or hostile, where the acquirer bypasses management and appeals directly to shareholders.
With mergers, companies surrender their existing stocks, and new equity shares are issued for the combined company. That means your old options or shares are usually converted into new ones that reflect the merged entity’s capital structure.
With acquisitions, the acquiring company's equity shares continue to trade, while the acquired company’s shares are retired. Solid equity management practices from day one can directly affect how favorable your outcome is during an exit. Sometimes employees are offered a cash payout. Alternatively, they may receive stock in the acquiring company, or a mix of both.
In both cases, the future of your equity will not be determined until the vote for the deal is passed, and it’s cleared by regulators. Large deals often face lengthy review periods, which can leave employees in limbo for months at a time.
Your company has been acquired. What’s next? Start by asking these questions.
Yes, but there are risks. If a deal is delayed — or ultimately doesn’t go through — you may be faced with a tax burden, in the form of the alternative minimum tax. Knowing how taxes impact startup equity can help you decide whether exercising pre-exit makes sense.
That depends. Vested and unvested stock options can be converted to the options of the acquiring company, with terms dependent on the deal in place. In some cases, stock options could be canceled, or a cash or stock payout could be offered.
When your startup is acquired, be sure to inquire about the terms of your vested and unvested stock options. The terms of the deal often dictate whether you receive cash or shares in the acquiring company.
Yes. Platforms like Augment* enable the sale of startup stock options to other accredited investors. These private secondary markets are relatively new, but increasingly popular, particularly for employees who want more financial certainty ahead of major corporate events.
Life can come at you fast. Whether you’re about to have a child, purchase a house, or facing another big life change, increased access to funds can help you be prepared for what’s next. But liquidity may be limited when all of your equity is tied up in a company that’s being acquired.
Augment was built with this flexibility in mind.
Augment’s private secondary market trading platform allows investors to buy and sell existing stakes in private companies or funds before a traditional exit event, such as an acquisition.This enables individuals not only to access liquidity when they need it most, but also to diversify their financial position, reduce risk, and avoid having their entire net worth tied to a single company’s outcome. Here’s why timing matters when entering the private market, especially as liquidity windows open or close around acquisitions.
In practice, this could mean selling a portion of your shares to cover a down payment on a home, securing cash to pay unexpected medical expenses, or simply rebalancing your portfolio to include more stable assets alongside high-risk startup equity.
Augment has opened an avenue for liquidity in the private market, helping investors to meet their cash needs. By offering a transparent marketplace with pricing data and transaction support, platforms like Augment are bridging the gap between the long timelines of traditional exits and the real, immediate financial needs of startup employees.
*Securities transactions are executed on Augment Capital, LLC's ATS and offered through Augment Capital, LLC (member FINRA/SIPC).
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.