Your Private Company Was Acquired: What Happens to Your Equity?

Your company just announced it’s being acquired. For years, your equity was a number on a cap table you couldn’t sell. Now it’s about to turn into cash, stock in the buyer, or some mix of both.

An acquisition can be the biggest financial event of your career. It can also bring a big tax bill and decisions on a short timeline. Here’s what to understand.

Start With the Documents

How your equity is treated depends on three things: your equity plan, your individual award agreements and the merger agreement. The company will usually send a summary of how awards are being handled. Read it carefully alongside your grant documents.

Make a list of everything you hold: vested and unvested options (ISOs or NSOs), RSUs, and shares you’ve already exercised, bought or early exercised with an 83(b) election. For each, note the grant date, exercise price, vesting schedule and the date you acquired any shares.

Cash Deal, Stock Deal or Both

In a cash deal, your equity is generally converted into cash at closing. That ends your exposure to the company, but it can also create a large, immediate tax bill.

In a stock deal, your equity is converted into shares or awards of the buyer. In a tax-free reorganization, shares you own may be exchanged without immediate tax. But you trade a concentrated position in one company for a concentrated position in another, and you may face a lockup period before you can sell.

What Happens to Vested Stock Options

Vested options are commonly cashed out at closing. You receive the spread, the deal price per share minus your exercise price, times the number of options, without having to exercise and pay for the shares yourself.

A cash-out is typically taxed as ordinary income, and that applies to ISOs too. Because the shares were never held, the favorable ISO tax treatment is lost.

In a stock deal, vested options may instead be converted into options on the buyer’s stock, adjusted by the exchange ratio. Your total spread generally stays the same, and you keep the decision of when to exercise.

If your exercise price is higher than the deal price, your options are underwater. They may be cancelled with no payment.

What Happens to Unvested Equity

Unvested awards are where deals vary the most. They may be assumed or converted into the buyer’s equity on the same vesting schedule, replaced with new awards, converted into cash that’s paid out as you continue to vest, accelerated, or in some cases cancelled.

Check whether your agreement includes acceleration. Single-trigger acceleration vests some or all of your unvested equity at closing. Double-trigger acceleration requires a second event, usually being terminated without cause or resigning for good reason within a set period after the deal. Double-trigger is the more common of the two.

Many buyers also offer retention packages, new grants or cash bonuses that vest over the next year or two, with their own strings attached.

Private Company RSUs

Many private companies grant double-trigger RSUs. They vest only when both a time-based condition and a liquidity event, such as an acquisition or IPO, are met. Years of RSUs can vest all at once at closing.

All of that value is taxed as ordinary income in a single year. Companies usually withhold federal tax at a flat 22%, or 37% on supplemental wages above $1 million. If your tax bracket is higher than 22%, that leaves a gap, and you may owe a lot more in April. Plan for it before closing, not after.

Shares You Already Own

In a cash deal, shares you’ve already exercised, bought or early exercised with an 83(b) election are treated as a sale of stock. If you’ve held them more than a year, the gain is generally a long-term capital gain, taxed at lower rates than ordinary income.

If you exercised ISOs and still hold the shares, the timing matters. Selling before you’ve held them for two years from grant and one year from exercise is a disqualifying disposition, and part of the gain is taxed as ordinary income.

Founders and early employees may qualify for the qualified small business stock (QSBS) exclusion under Section 1202, which can exclude some or all of the gain from federal tax. The rules are strict, so confirm eligibility before closing.

Read the Fine Print on the Payout

The headline deal price usually isn’t what you get per share. Preferred investors often have liquidation preferences that are paid before common shareholders and option holders. In a smaller exit, that can take a large share of the proceeds.

Part of your payout may also be held back. Escrows and holdbacks, often around 10% of the deal price, are commonly set aside for a year or more to cover claims against the seller. Earnouts pay more later only if the business hits certain targets. Treat that money as uncertain until it’s paid.

Executives: Watch for Golden Parachute Rules

If you’re an executive or officer, payments tied to the deal, such as accelerated vesting, cash bonuses and severance, may be subject to the golden parachute rules under Section 280G. If those payments reach three times your average annual compensation over the past five years, you can owe a 20% excise tax on everything above one times that average, on top of regular income tax.

Private companies can often avoid this if more than 75% of shareholders approve the payments. Ask whether a 280G analysis has been done and how it affects you.

Plan for the Tax Bill

Your income in the year of the deal can be several times what it normally is. Steps to consider before year-end:

• Estimate your total tax for the year and make estimated payments to avoid an underpayment penalty.
• Max out your 401(k) and any other pre-tax savings available to you.
• If you give to charity, consider front-loading gifts, for example through a donor-advised fund, in the high-income year.
• If you hold investments with losses, harvesting them can offset capital gains from the sale.
• Remember state taxes. New Jersey taxes capital gains as ordinary income, at rates up to 10.75%.

If You’re Getting the Buyer’s Stock

If you’re receiving a public buyer’s stock or awards, you’ve gone from concentrated in one company to concentrated in another, now with a price that moves every day. Make a plan for how much you want to keep and how you’ll diversify the rest once any lockup ends and trading windows allow.

Decide What the Money Is For

A large payout can change your timeline for buying a home, paying off debt or reaching financial independence. Before the money arrives, decide what goes to taxes, what you keep in cash and what gets invested.

Some of these decisions have to be made quickly and can’t be undone. If your company was just acquired and you want help understanding your options, let’s talk.

Michael Walstedt is a fee-only financial advisor and founder of Reliant Wealth Advisory, based in Hoboken, NJ. This article is for general informational purposes and may not apply to every individual situation. If this is a question you’re actively considering, a personalized conversation can often bring clarity.