Navigating Muddy Waters: Dealing With Stock Options in an Acquisition Scenario for International Employees

Understanding the Impact of An Acquisition on Stock Options

When an acquisition is announced, one of the first questions that crops up for employees with stock options is, "What happens to my stock options?" Generally, the impact on stock options depends on the terms of the acquisition agreement. There are several scenarios:

• Accelerated Vesting: Sometimes, an acquisition triggers accelerated vesting, allowing employees to exercise their options sooner than planned.  This trigger is something that was normally already laid out in the equity agreement, but can nonetheless also be negotiated during the acquisition process, even to the extent of allowing employees who haven’t passed their cliff (aka the period of employment before vesting starts) to benefit from the acquisition.
• Conversion or Replacement of Stocks: In other cases, existing unvested stock options may be converted or replaced with new options in the acquiring company, potentially altering their value. This can happen if the acquiring company offers a different equity incentive plan or if there are changes in the stock price.
• Cash Out: And finally, employees may have the option to cash out their stock options during an acquisition. This typically happens when the acquiring company decides not to retain the equity plan of the acquired company, or as a part of the agreement (which can include all three of these scenarios at once).

For international employees, understanding this impact requires navigating not only the acquisition terms but also the legal and financial landscape in their own country, not that of the company. Here are some key considerations for international employees:

• Exchange Rate Fluctuations: With the acquisition of a foreign company, there is potential for fluctuations in the exchange rate. This can impact employees' final cash out amount, as they may end up with a different value than originally planned.
• Tax Implications: In most countries, acquiring or disposing of stock options during an acquisition has tax implications. Employees should seek professional advice to understand any potential tax consequences.
• Legal Considerations: Depending on the location and structure of the acquired company, there may be specific legal considerations that could impact employees' stock options. For example, in some countries, certain employee protections or regulations may apply to equity compensation plans.

Your journey to better, clearer international equity practices starts here

The Process of Cashing Out

Cashing out stock options during an acquisition involves a few critical steps for employees. Firstly, it is essential to review the acquisition agreement and any communications from both companies to understand your options. If a cash out occurs, here’s what you need to consider:

1. Vesting Status: Ensure your options are vested. Unvested options may not be eligible, depending on the acquisition terms.
2. Exercise Window: Be aware of the timeframe for exercising your options before the acquisition officially closes.  That said, most of the time the exercise price will be deducted from the proceeds of the sale immediately, so there will be no exercise action to take prior to closing.
3. Exercise Cost and Method: Determine how much it will cost to exercise your options and the method of payment accepted by your company.

For employees residing in a different country from the company, it is crucial to work closely with HR and/or a financial advisor to understand how these steps apply within the context of cross-border regulations.

‍

Tax Implications Across Borders

Taxation can significantly affect the net value of cashing out stock options. Tax implications vary widely depending on the country:

• Capital Gains vs. Income Tax: Some countries tax stock option profits as capital gains, often at a lower rate than income tax, while others consider them as regular income.
• Double Taxation Agreements (DTA): DTAs between the company’s home country and the employee’s resident country can influence which country has taxing rights and how double taxation is avoided.
• Reporting Obligations: International employees may have to report and pay taxes in both their home country and the company's home country, depending on local laws.

Want to understand more about tax implications for your international equity?  Get started here

‍

Real-Life Insights

Sharing experiences, several international employees who navigated acquisitions highlighted the importance of early preparation and consultation with financial and legal advisors. One common piece of advice was to actively seek information and not rely solely on employer communications, as understanding the nuances of cross-border stock option cash-outs can significantly impact your financial outcomes.

‍

Conclusion

For international employees, cashing out stock options during an acquisition presents both opportunities and challenges. By understanding the acquisition's impact, navigating the cash-out process wisely, being mindful of tax implications, and employing strategic thinking, employees can make informed decisions that align with their financial objectives.

Your journey to better, clearer international equity practices starts here

‍