Ask HN: Former employees that went through an acquisition with equity payout
What was the timeline on the equity payout, and how was the payout managed?
Were there any gotchas you discovered at this stage?
Were there any gotchas you discovered at this stage?
13 comments
[ 1.5 ms ] story [ 44.0 ms ] threadThe worst thing I’ve seen is when the leadership team of majority shareholders colluded to water down the rest of the employee-level shareholders in anticipation of the acquisition. Everyone got paid out, but it wasn’t at the levels people expected based on their previous knowledge of their equity value.
This isn’t as bad, but another common tactic was the leaders shift personal value towards themselves with high earn-out packages in lieu of a lower price tag for the acquisition. This applies more to smaller acquisitions.
The reality of a non-voting shareholder is that you don’t have much say in how the deal is done. My word of advice is to make sure you work for ethical leaders that truly care for people. This will help ensure that their good judgement is applied outside of just their own family and personal financial interests.
The equity payout happened within a few days of the official close. It was a wire transfer. Understand that the public announcement is often different than the actual close.
You are asking about equity but make sure you actually have that. I’m constantly surprised by people saying they have “stock” in a company when it’s only options.
If you have actual equity, check if it meets the requirements for Qualified Small Business Stock (QSBS)
If you have equity, you may not get all the payout immediately. Often a percentage of the purchase price of the company is held in escrow for some period of time usually 12 to 24 months, to handle various things that come up. Everyone who owns actual equity has that same percentage of their payout withheld. Depending on what happens you may not get any of that money. Even if you get it all payed out in 24 months time, no interest is paid
If you have stock options, the acquiring company may just buy them out. Basically instead of you having to exercise your options, cut the purchased company a check to buy them, only to have the acquiring company cut you check for your shares, they just buy out your shares for the per share price, minus your strike price. The net financial result to you is the same, with less paperwork. This is not a decision individuals in the company make themselves. Its defined as part of the acquisition. If so this payment comes in via direct deposit like normal compensation.
Depending on your situation consider using a CPA for your taxes for the tax year the acquisition occurs in. You don’t want to mess this up.
Find a CPA that has worked with people who have had equity events. Most CPAs have never dealt with something like this. If you are high enough to have been part of due diligence you met the lawyers for your company. They can usually recommend a CPA who can handle it
A few other thoughts:
Fight the temptation to ask other people how they did in the acquisition. There will always be people that made more than you. If you learn specific numbers for others, you can try hard to not be jealous, but it can be corrosive. It’s better not to know.
There are many good articles on managing a windfall. Read them and follow the advice that works for you
Any sense on which normally comes first?
For us the order of events were:
- One month of technical due diligence, one month of business/legal due diligence. Very few people in the company being acquired were involved.
- A final week of paperwork, legal going back-and-forth on the actual terms of the merger and planning the announcement.
- signed merger agreement
- The very next day held a company all hands to tell everyone the deal had been done. High-level leaders at the acquiring Company were there to answer questions. Lots of very very very happy people, champagne toasts, etc.
- very next day after that, public announcement of merger press releases etc. “close date” was roughly 3 weeks in the future.
- until the close date we weren’t officially employees of the new company, because the merger hadn’t officially closed. We went about our business
- Close date happened. On that day previous company ceases to exist and we are all new employees of the acquiring company. Wire transfer Happened that day for the equity. Permit for the stock options buyout happened about a week and a half later as part of our pay period.
1) Youtube founders and staff waited quite a while (months) before the deal was really closed (likely due to massive lawsuits from Hollywood/MPAA costing about $1 billion.)
2) Cobalt founders made money, but employees got nothing after the Sun acquisition for $2 billion:
https://en.wikipedia.org/wiki/Cobalt_Networks
Days before the acquisition, the acquiring company gave us all interest-free loans to purchase the stock that we had options for. (we just signed the paperwork, and did not need to directly deal with the stock or money) At the moment of acquisition, that stock was all purchased by the acquiring company. We then got the money for that pretty quickly.
Exercised options and vested RSUs were paid out at a certain price per share.
Unvested RSUs and options were converted to options and stock of the acquiring company, at proportional unit and strike price, with the same vesting terms.
People with vested, but unexercised options were given a choice between exercising their options and getting cash after close, or holding on to their options and getting options of the acquiring company.
The money transaction was handled by Computershare.
Expect a large tax bill.
You might get to learn how much stock top management owns. Except some unhappiness in the troops right after that announcement.
Happy to answer other specific questions.
* The company was acquired for ~1B, but the amount of equity individual contributors had still came out to pretty paltry sums (~$20k over 4 years for more junior engineers, maxing out at maybe $200k over 4 years for staff+ level).
* To make up for the uncompetitive equity buyout, they offered retention packages that seemed good on the surface. However, they were all backloaded: either on a 10/20/30/40 schedule or a 0/0/50/50 depending on amount. Almost all employees left before vesting most of their retention package, and no matter how you calculated it no one was being paid fairly versus what they could have made working from a competitive public company from the get-go.
Aww, that is a very small employee option pool. Sorry to hear about the experience.
In addition to the (very generous) retention bonus, It seemed various options were paid out slowly over the first few years of acquisition.
People did pretty well (in the $100ks range). But it did see the company pretty much decided to pay out the employees “equity” on its own schedule. I think depending on the vehicle used to own “equity” the acquired company has a lot of flexibility when negotiating with the acquiring company in terms of payment schedules, etc so people don’t all suddenly quit the day after acquisition.