The rumors swirling around the water cooler are true: Your company is pursuing a merger with another firm. So what happens to your stock options? As employees, if your company gave you stock options as part of your compensation packages, how those unexercised stock options will be treated within the context of a merger will depend on a wide range of factors, including your level, the value of the stock, your company's maturity, the nature of the industry in which you work, the type of options your company granted you, the vesting schedule, and first and foremost, the stated terms of the merger itself.

Accelerated vesting often occurs during a change of control event such as a merger, when your company is acquired by another or when it goes public.

According to David Hornik of the Stanford Graduate School of Business, two forms of accelerated vesting exist: Single-trigger accelerated vesting of stock options happens the minute the company merges.

Double-trigger accelerated vesting happens when your company merges and you or your spouse lose your job as a result.

Carefully review the terms of your contract to see if your company will give you accelerated vesting during the merger. In some cases, a merger between two entities will result in the cancellation of the stock options. In this case, your company informs you well in advance of the cancellation of existing employee stock options and gives you a window of time in which you may exercise the options that have already vested, assuming they are worth something.

If this is true in your case, make sure you speak to your broker or financial adviser about the tax implications before you exercise the options. Unexercised stock options may also be cashed out during the merger by the surviving company or by the acquiring company.

Cashing out tends to be the preferred route for all parties involved. The surviving company avoids the complex challenges of taxes and administration -- not to mention the stock issuance procedure -- and the employees get a tidy little lump sum payout. The surviving company may also assume the stock options in order to avoid creating a drop in equity, or it may substitute its own stock options for those of the acquired company to maintain uniformity.

Again, these decisions are made on a case by case basis.

The choice often depends on whether the surviving company is a public corporation and what action will be more fiscally prudent under federal statutory tax law. Mergers affect employee stock options in multiple ways. Accelerated Vesting Accelerated vesting often occurs during a change of control event such as a merger, when your company is acquired by another or when it goes public.

Frank Denneman

Cancellation In some cases, a merger between two entities will result in the cancellation of the stock options. Cash Buyout Unexercised stock options may also be cashed out during the merger by the surviving company or by the acquiring company.

Assuming or Substituting Stock Options The surviving company may also assume the stock options in order to avoid creating a drop in equity, or it may substitute its own stock options for those of the acquired company to maintain uniformity. References Employee Benefits in Mergers and Acquisitions; Ilene H.

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