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Acquisition: What Happens After a Shift of Power? Part 6

Acquisition: What Happens After a Shift of Power? Part 6

Who will profit from your stock options?

In our last blog post, we continued to uncover aspects of a merger or acquisition that could impact the financial future of your employee stock options. We began discussing popular exchanges that could occur and introduced the cash exchange and exchange for buyer options. As an employee, a merger or an acquisition is nerve racking, it brings out insecurities because of the unknown and sparks a plethora of questions.

In our sixth and final installation, we will continue to discuss that burning question we introduced in parts one, two, three, four and five, “What will I get for my stock options?”  Last week, we discovered that there are four common exchanges that could occur during a merger or acquisition. Today, we will finish up our introductions and look deeper into the final two of the following four options throughout this post. In exchange for your stock options, you may receive:

  • Cash
  • Buyer options
  • Buyer stock
  • Cash and option combination

Buyer Stock:  This exchange is considered a stock swap or stock-for-stock exchange and is fairly straight forward; the purchasing company could offer to buy your shares at the fair market price during the acquisition.

MyStockOptions.com provides an example of this transaction, “You own 1,000 shares in your company. The buyer will exchange or “buy” those shares from you for 750 of its shares. The tax basis in your 1,000 shares is $5 per share ($5,000 total). Your tax basis in the buyer’s 750 shares is $6.67 per share (still $5,000 total). If you held your company stock for six months, you would be deemed to have held the buyer’s shares for the same amount of time.”

Most of these transactions are considered non-taxable but as always, be sure to double check IRS standards in section 368 to ensure that you are not subject to taxation for reason of disqualifying disposition or otherwise. Being aware of the various rules and regulations during an acquisition will be helpful.

Cash and Option Combination:  Simply stated, this exchange is a combination of share purchase and cash payout by the acquiring company.  Combining cash and options as an exchange enables the company to combine the two purchasing methods where necessary, but also allows the employee to have a bit more input into the sale of the shares during the acquisition.

MyStockOptions.com provided another great example, “The tax basis of your shares in the seller is $5. The buyer pays you for each share: one share in the buyer, valued at $15, plus $5 cash (so the total value received from the buyer is $20). Also assume this transaction qualifies as a tax-free reorganization under Section 368 of the Internal Revenue Code. Your total gain on the transaction is $15 (buyer’s share worth $15 + $5 in cash, minus your tax basis of $5).”

Be cognizant of the tax treatments that you will become subject to in a cash exchange and always consider asking the purchaser about taxes in relation to the purchase of your stock options in a combination with cash.

Here at Stock Connections, we specialize in helping individuals like yourself comprehend the various occurrences that could impact the future of your stock options during a merger or acquisition. If you or anyone you know is amidst a confusing merger or acquisition, we encourage you to contact us today; we are ready to help.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today.

Photo Credit: Tax Credits

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