What Happens to Your Equity Compensation When Your Employer Goes Private?

As stock prices decline globally, the market is seeing an uptick in public-to-private transactions, particularly within the struggling technology sector. Perhaps the most notable and widely publicized example of late is Elon Musk’s purchase of Twitter late last year for $44 billion. 

Indeed, Musk’s acquisition created uncertainties for both public shareholders and Twitter employees—specifically those with stock options. With take-private deals up nearly 100% year over year in the U.S., many more tech professionals are left wondering what may happen to their equity compensation in a take-private transaction. 

What Does It Mean When Your Employer “Goes Private?”

When a company goes private, it converts from a publicly traded company to a private entity. Typically, this is the result of a private equity buyout, management buyout, or tender offer. 

Before going private, a public company must receive shareholder approval. The company requests to purchase all outstanding shares at a certain value, which is typically above the current share price. 

Anyone who holds voting stock in the company can vote on the proposed deal. However, institutional shareholders tend to have the greatest influence on the outcome since they hold a larger percentage of shares. 

Once a company goes private, its shares are delisted from an exchange, and shareholders receive a cash payment in exchange for their shares. Thus, if you have equity compensation and have already exercised your options, you’ll likely receive a cash payout when the deal closes. 

Notably, not all public-to-private transactions are permanent. In some cases, a company will go private long enough to improve the health of the organization, then hold a subsequent initial public offering (IPO). 

How Does Going Private Affect Employee Equity?

When a take-private transaction closes, public shareholders may receive cash for the value of their shares. Keep in mind if you’ve already exercised your options and hold company stock when your employer goes private, you may incur a short- or long-term capital gain when the deal closes. 

Though you may have planned to hold the stock long-term, the cash payout you receive in a take-private transaction forces the potential tax consequences into the current tax year. For example, if your employer purchases your shares for $50/share per the deal’s terms and you purchased your shares for $40/share, you’ll owe takes on the gain. Be sure to consult a financial planner or CPA on how this may impact your overall financial plan and tax liability. 

If your compensation package includes unexercised stock options, restricted stock units (RSUs), or any other type of equity compensation, your fate may not be as cut and dry. In most cases, you won’t know for certain what happens to your equity until the take-private deal is final. 

Even then, it may take time to work out the details of your specific case. Nevertheless, it’s important to understand how each potential outcome may impact your financial plan, so you can prepare accordingly. 

Here’s what can happen to your equity compensation when your employer goes private: 

In general, the type of equity compensation you have and whether it’s vested or unvested are the primary factors that determine what happens to your equity after your employer goes private. With that in mind, there are a few common outcomes that can help you understand what to expect in a take-private deal. 

Vested Stock Options

If your stock options are vested, you have the right to certain guarantees according to your equity compensation agreement. Specifically, you have the right to purchase company stock at a certain price. 

Typically, your employer can handle vested employee stock options in one of three ways in a take-private deal.

#1: Cash Out Your Options

One potential outcome is that the acquiring company pays you cash for the value of your stock options. The amount you receive depends on the current exercise price of your options, the new stock price, and any other payment terms the two companies negotiated during the transaction. 

It’s important to note that if your employer cashes out your stock options at closing, it can result in a substantial payroll tax for both the buyer and the employee. You may want to consider the pros and cons of exercising your vested stock options before the transaction closes to avoid paying this tax. 

A financial planner like Simplicity Wealth Management can help you determine if exercising your stock options makes good financial sense, and if so, how to minimize your tax liability. 

#2: Assume or Substitute Your Stock Options

In some cases, the acquiring company will assume your stock options. Alternatively, they may substitute your stock options with shares of their own stock. 

In either case, you’ll have the option to purchase shares of the private entity. This can create problems down the road, as your shares may be difficult to sell or complicate your tax return.  

#3: Cancel Underwater Options

If you have vested stock options that you haven’t yet exercised, it may be because they’re underwater. In other words, your exercise price is above the stock’s current market value. 

If your employer goes private when your stock options are underwater, the acquirer may cancel your options without a payout. Alternatively, they may offer you a nominal payout for your options. 

Unvested Stock Options and RSUs 

Depending on the terms of your grant agreement, your stock options may not have vested yet. Meaning, you haven’t yet earned your shares. 

Meanwhile, restricted stock units (RSUs) and restricted stock awards typically settle in shares or cash when they vest. If either is part of your equity compensation, you’re probably unvested. 

Again, the terms of the acquisition and your compensation agreement will determine what happens to your equity compensation when your employer goes private. However, there are a few potential outcomes for your unvested stock options and RSUs in a public-to-private transaction. 

#1: Accelerate Your Vesting Schedule

In some cases, a publicly traded company will speed up your vesting schedule in a take-private deal. Your grant agreement and the specific terms of the deal typically play into this decision. 

If your options vest prior to the deal closing, you may be able to exercise them if they’re in the money. However, many companies prevent employees from exercising their options when a buyout is pending. 

Depending on the type of equity compensation you have, there may be complex tax considerations if the acquiring company accelerates your vesting schedule. Be sure to consult a tax expert or financial planner who specializes in non-cash compensation about your specific situation. 

#2: Cancel Unvested Stock Options and RSUs

Even if your stock options or RSUs are in the money, an acquiring company can cancel your unvested grants in a take-private deal. For example, they may not want to dilute existing shareholders, or perhaps they couldn’t raise enough cash to accelerate your vesting schedule. 

Since an employer gives RSUs to employees, they can’t go underwater. However, stock options can, depending on your exercise price. Indeed, unvested stock options that are underwater are most at risk of being cancelled without a cash payout when your employer goes private. 

#3: Cash Out, Assume, or Substitute Your Unvested Options

Like vested stock options, an acquirer can assume or substitute your unvested stock options or RSUs. You may also receive a cash payout. 

In such cases, the acquirer may require you to meet certain conditions—for example, you may have to agree to stay with the new company for a period of time. 

Simplicity Wealth Management Can Help You Navigate Employee Compensation When Your Employer Goes Private 

When your employer goes private, it can raise a multitude of questions from your future employment with the company to the fate of your equity compensation. This is especially true if you have different types of equity compensation with varying vesting schedules and exercise prices. In most cases, you won’t have definitive answers until after the deal is final. 

While it may be tempting to jump ship in a take-private transaction, be sure to evaluate the terms of your equity compensation agreement before making any moves. Departing prematurely may result in leaving a meaningful amount of money on the table. 

A financial planner like Simplicity Wealth Management can help you navigate complex financial decisions like what to do with your equity compensation when your employer goes private. Based in Richmond, VA and serving clients across the U.S., we specialize in the financial planning needs of busy tech professionals with equity compensation. To learn more about how we can help, please schedule a call.