What happens to my stock options if my company goes private?

Navigating the Murky Waters: What Happens to Your Stock Options When Your Company Goes Private?

The excitement of working for a publicly traded company often comes hand-in-hand with the potential upside of employee stock options. These options represent a chance to own a piece of the company and benefit from its success. But what happens to these options when the company decides to shed its public skin and go private? The answer, unfortunately, isn’t straightforward and heavily depends on the specifics of the deal taking the company private.

A “going private” transaction, often referred to as a leveraged buyout (LBO), typically involves a private equity firm or a group of investors acquiring all outstanding shares of the publicly traded company. This removes the company from public stock exchanges and effectively places it under private ownership. While this can be beneficial for the company in terms of long-term strategy and reduced regulatory scrutiny, it can create uncertainty for employees holding stock options.

The crucial factor determining the fate of your stock options is the acquisition agreement. This document, hammered out between the acquiring entity and the company, dictates the terms of the transaction and explicitly outlines what will happen to outstanding employee stock options. Here’s a breakdown of the most common scenarios:

1. Cash Payout:

This is often the most favorable outcome for employees. In this scenario, the acquiring entity will offer a cash payment for each outstanding stock option. The amount paid is typically based on the difference between the acquisition price and the exercise price of the option. This provides employees with immediate liquidity and allows them to realize the value of their vested options. However, it’s important to understand the tax implications of this cash payout, as it’s generally treated as ordinary income.

2. Conversion to Private Company Stock:

Another possibility is that your existing stock options, or shares already exercised, are converted into equivalent equity in the newly private company. This means you retain an ownership stake, but the liquidity of that stake is significantly reduced. Trading private company stock is far more difficult than trading publicly traded shares. The potential future value depends entirely on the success of the private company under its new ownership. This outcome is often seen as riskier, as it ties your future financial gains directly to the performance of a company operating in a different environment.

3. Cancellation of Stock Options:

In some cases, the acquisition agreement may stipulate the cancellation of unexercised stock options with little or no compensation. This is undoubtedly the least desirable outcome for employees. While vested options are more likely to be addressed favorably, unvested options are particularly vulnerable to cancellation. The justification often lies in the shift of strategic direction and the altered risk profile of the company under private ownership.

The Importance of Legal and Financial Counsel:

Navigating the complexities of a going-private transaction and understanding its impact on your stock options can be daunting. The specific language of the acquisition agreement is crucial, and it can be difficult to interpret without expert guidance. Therefore, it is highly recommended to seek legal and financial counsel.

• Legal Counsel: A lawyer specializing in employee benefits and stock options can help you understand your rights and obligations under the acquisition agreement. They can also advise you on the potential risks and rewards of each scenario.

• Financial Counsel: A financial advisor can help you assess the financial implications of different outcomes, including the tax consequences of a cash payout or the long-term potential of holding private company stock. They can also help you develop a strategy for managing your finances in light of the transaction.

Going private presents a significant turning point for a company and its employees. While the future of your stock options hinges on the specifics of the acquisition agreement, understanding your options and seeking professional advice are crucial steps in protecting your financial interests. Don’t let the complexity of the situation leave you in the dark; take proactive steps to understand and navigate this critical transition.