You're sitting at your desk working away when you get an email from your CFO with the title: "Announcement: StartupCo Has Been Acquired by CorporateCo".
After reading through the email, you realize that the acquisition has been in the works for months. You'll retain your job but what happens to your restricted stock units (RSUs)?
The Levels.fyi community received a couple similar questions (one from a Senior Engineer at Twitter, and another from a Solution Architect interviewing at a pre-IPO company), and we thought that Compound could help employees learn a bit more about this topic. It's not easy to understand, and making the wrong decision could cost you a lot of money.
Additionally, during a market downturn, the chances that your company is acquired are actually higher than if the IPO market was hot. If a large company has a lot of cash on its balance sheet (as many do), it can use this cash to buy companies at cheaper prices. Learning about acquisitions is even more relevant now in 2022.
In this essay, we'll outline a few steps you should take if your company gets acquired:
What do you own?
What are you getting?
What actions can you take to maximize your result?
Editor's Note: If you're interviewing and getting offers, the Levels.fyi coaching team can help ensure you don't leave any money on the table with their Negotiation Service.
1. What do you own?
The first step is to figure out what you own. You'll need to know the quantity of your RSUs, which is a bit more complicated to figure out than you might expect.
The total number of shares can be found in your offer letter or cap table management provider. If you're at a private company, this provider is probably Carta, Shareworks, or Pulley. If you're at a public company, it's probably Schwab, eTrade, or another brokerage.
The next step is to figure out how many shares are vested. Vested shares (the ones you own) are often treated differently in an acquisition than unvested shares. Your brokerage account will show you the positions you hold and an account statement from the brokerage will show you the amount granted and the amount vested. Your vesting schedule is also included in your offer letter.
If you're at a private company, your RSUs are subject to either single trigger or double trigger vesting. Most likely, they are on a double trigger vesting schedule (and this is beneficial for you). Let's explain this quickly.
Restricted stock units are a "pledge" by a company to transfer ownership of shares to employees after certain conditions have been met (called "vesting"). RSUs became popular at private companies because of an SEC rule that required companies to have a much higher level of reporting standard if they had 500 shareholders or more. Since companies didn't want to provide valuable information to the public (like revenue and customer data), they used RSUs (already popular with public companies) to promise equity to employees without giving it to them immediately.
The first RSUs would vest according to a time-based schedule, typically 4 years with a 1-year cliff (so ¼ of the shares would become vested after 12 months, and an additional 1/48 of the shares would vest each month after that). This is still the standard schedule.
However, when an employee receives stock from a company (or when RSUs vest), it triggers a tax event. For employees at public companies, this isn't a big problem – employees can just sell some of the shares in order to cover the cash tax bill. However, in private companies, this is a problem. RSUs would vest, they would count as taxable income, and the employee would have to come up with cash taxes. But because the company is private, they can't sell any shares to cover the bill, so they face a liquidity problem. The company would be putting the employees into a tax trap.
So, "double-trigger" vesting became the norm. Double trigger vesting means that the RSUs become shares only after two events. Typically these events are:
Time-based schedule (standard 4-year total, 1-year cliff)
AND a liquidity event (acquisition or IPO)
This enables companies to grant RSUs to their employees but not have them receive the shares until a liquidity event. This is good for the employee because then they can sell some of their shares during that liquidity event to pay for the taxes when those shares need to be reported as income.
If you're at a public company, your shares will vest over time according to your vesting schedule. Additionally, they are taxed as they vest, and typically your company will sell a portion of your shares in order to pay the taxes for you (so if 1,000 shares vest, they might sell 350 of them to pay the tax bill, leaving you with 650).
2. What are you getting?
Now that you know what you have, figure out what you are getting. Here are a few common questions and some of the answers you might receive.
How much cash am I receiving? If your company is acquired, you can either receive cash or stock as compensation for your shares. It also doesn't have to be all-or-nothing. Depending on the details of the transaction, the seller can receive any amount of cash or stock. Your company should communicate the proportion of cash and stock that you are receiving as an employee, and if they don't, you should ask them.
If your shares are being purchased for cash, this transfer will count as a taxable event. You'll likely have to pay capital gains (either short-term or long-term, depending on how long you've held the shares). The difference between short-term and long-term capital gains can be up to 20%, but unfortunately in this scenario, you won't have any choice about when to sell.
How much stock am I receiving? If your company is sold for stock, the shares in your old company will be converted to the shares in your new company. The conversion rate will depend on the share price of each company, but from a value perspective, it should be similar. If your shares are being purchased for stock in the new company, it most likely won't trigger a taxable event.
What happens to my unvested shares? The outcome of your unvested shares depends on the acquisition. Sometimes the new company will keep the same vesting schedule and terms as the old company. Sometimes they will take the unvested shares and incorporate them into the new company's equity compensation plan (whether that is equity, bonuses, etc.). The new company could also just cancel any unvested shares. It's all dependent on the details of the merger agreement and the acquirer's compensation strategy.
3. What actions can you take?
If your company is getting acquired, here are the decisions you should consider.
Model your equity and tax liability. Once you're acquired, you'll need to know how much cash and equity you are getting as well as how much taxes you'll have to pay. Ensure that any taxes withheld from the exchange cover your full tax liability. An experienced tax specialist in performance compensation can provide a review and analysis for you.
Evaluate your liquidity. You'll need to decide what to do with your newfound liquidity. If you have cash, how are you going to invest it? If you have stock, do you want to sell some of it to diversify your portfolio? These questions should be answered against the backdrop of the rest of your personal balance sheet in addition to your financial goals.
Note: Compound helps tech employees work through tax and liqudity decisions exactly like this one. None of this article is financial advice, but if you are looking for modeling tools or human advisors to help you through this decision, we can help. Sign up here.
Consider your career choices. Once your company is acquired, a number of things can happen. In the short-term, there will likely be a lot of integration work to merge all of the systems together and cross-sell customers to each other.
In the long-term, consider if you want to be a part of the acquiring company. Ask your manager if your role will stay the same. Also consider if you believe in the prospects of the acquiring company. Are they growing quickly? Are they producing cash flow? Do you believe in the management team?
While some acquisitions will be better for you than others, things will certainly change. It's a natural time to reevaluate your personal finance and career choices. Evaluate these choices thoughtfully.
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