What Happens to Stock Options During a Merger?

Accelerated vesting often occurs during a change of control event such as a merger, when your company is acquired by another or when it goes public. According to David Hornik of the Stanford Graduate School of Business, two forms of accelerated vesting exist: single-trigger and double-trigger. Single-trigger accelerated vesting of stock options happens the minute the company merges. Double-trigger accelerated vesting happens when your company merges and you or your spouse lose your job as a result. Accelerated vesting is contentious, since the executive who was “fired” gets to cash in his or her stock while the one who was “more valuable” actually has to wait around for his or her shares to vest under the new regime. Carefully review the terms of your contract to see if your company will give you accelerated vesting during the merger.

In some cases, a merger between two entities will result in the cancellation of the stock options. In this case, your company informs you well in advance of the cancellation of existing employee stock options and gives you a window of time in which you may exercise the options that have already vested, assuming they are worth something. If this is true in your case, make sure you speak to your broker or financial adviser about the tax implications before you exercise the options.

Unexercised stock options may also be cashed out during the merger by the surviving company or by the acquiring company. Cashing out tends to be the preferred route for all parties involved. The surviving company avoids the complex challenges of taxes and administration -- not to mention the stock issuance procedure -- and the employees get a tidy little lump sum payout.

The surviving company may also assume the stock options in order to avoid creating a drop in equity, or it may substitute its own stock options for those of the acquired company to maintain uniformity. Again, these decisions are made on a case by case basis. The choice often depends on whether the surviving company is a public corporation and what action will be more fiscally prudent under federal statutory tax law.