As we’ve previously discussed, when a firm is acquired, it’s natural for two key topics to immediately come to mind: first, the potential threat of job loss and lack of visibility, and second, feeling on top of the world about monetization of stock-based compensation. While there isn’t much that can be done about the former, there is a lot at stake financially regarding the latter, and that’s where Paceline can help.
This is a natural part of the corporate lifecycle
For those who work at public companies, the prospect of an acquisition of may seem like something your firm has put in the rearview mirror after an IPO listing, but these types of acquisitions actually happen all the time. Even for public companies, the prospect of being acquired is always on the table to some degree, and it really comes down to when, by whom, and for what price. The big difference here is that in a public company, this may not be front of mind as your firm’s stock has liquidity so employees don’t need to wait for a liquidity event to monetize (i.e. sell for cash) their shares.
For those at private companies, acquisitions tend to be a positive thing. Because private company stock is not freely tradable, a liquidity event is necessary for employees to monetize their employer stock. Liquidity events tend to come in three forms: 1) an acquisition, 2) an IPO, or 3) potentially a tender offer (often in conjunction with a new round of funding). But the most common is to be acquired.
It’s important to keep in mind that the objective of all those financially involved (not just management and employees, but the underlying PE and VC fund investors) is to get their money back and earn an attractive return. All parties here are making an illiquid investment lasting several years, so it’s critical for the business to have a viable path to exit.
Get the plan, have a plan
In evaluating how a transaction will affect your stock-based compensation, the most important thing is to gather all the relevant paperwork pertaining to your stock grants. Make sure you have available:
• Stock grant(s) - to understand how many options or shares you have, and what type they are
• Shareholder plan - to understand key shareholder rights and obligations
• Vesting schedule - to understand how it’s structured and how much of your equity is already vested
Remember that stock grants are all about you, meaning they’re awarded individually and contain key terms including the vesting schedule, whereas the Shareholder Plan documents apply to all shareholders.
In the Shareholder Plan, one of the key items to look for is a Change of Control clause, which determines what (if any) form of acceleration may happen to vesting upon an acquisition. Here, it may state specific requirements for vesting to accelerate, or it’s also possible that potential accelerated vesting will be decided by the Board of your firm.
For example, your Plan may indicate that vesting will accelerate if more than 50% of the company’s stock changes ownership, or for VC and PE-backed firms, it may state that this is contingent upon an acquisition where a valuation in excess of a specific amount of money is achieved (i.e. typically a multiple of where the firm was last acquired).
It’s also important to understand whether a qualifying event requires a single-trigger (i.e. an acquisition meeting certain criteria) or double-trigger (i.e. one where vesting is also contingent upon your position being eliminated). Knowing these details is critically important to assessing what your payout will really be.
Don’t be afraid to ask for help
These documents are often full of financial jargon and legalese, but it’s critically important to understand them so you know what you’re entitled to. At Paceline, we specialize in these types of financial events, and are happy to help you navigate the process.
Whether your company is currently being acquired, is likely to be acquired sometime soon, or if you just want to better understand your stock-based compensation, Paceline is here to help. Contact us today for a free consultation.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.