What Happens to Unvested Options in a Merger?

Q: I work at a startup in the valley, and I’m wondering what happens to unvested shares in the event of acquisition? I.e., should I expect that they are canceled, accelerated, or stay on the same vesting timeline?

A:  (Jason)  The answer is “all of the above.”  Any of these are potential outcomes in an acquisition.  It really depends on the negotiating strength of the companies involved.  

Most “standard” employee option plans have a provision in it that says if the acquirer does not assume the option plan and does not keep the options on the same vesting schedule and other similar terms, they vest immediately prior to the close of the merger.  So in this case, they are accelerated.

However, there are plenty of times that the option plan is simply assumed by the new owner of the business.  Rarely, have I seen all of the unvested options be canceled with no payout to employees, as this would lead to the acquirer angering all of its new employees.

Note also, that when exercising options prior to the closing of a merger, one heavily negotiated item is who gets the exercise cash, the acquirer or the target company?  Usually, we see this go to the target company unless it’s a distressed deal.