TLDR
For a startup, an M&A (exit) is where a larger company acquires the startup. In the best case, common stockholders receive liquidity in form of cash or stock.
If you own employee stock options in a private company it important to understand when they become valuable. You may be one of the first employees with a very low strike price or a new hire with a strike price that is equal to the current fair market value of the company, either way, your options don’t realize any value until your company goes through a liquidity event: an IPO or an M&A.
What are Mergers & Acquisitions (M&A)?
Mergers & Acquisitions or M&As includes multiples types of transactions between 2 (or more) companies, namely the obvious: Mergers and Acquisitions.
Mergers
A merger is the combination of 2 (or more) companies, given the approval of their shareholders. In a merger, the acquiring company typically continues to operate, while the acquired entity will cease to exist. For example, in the 2010 merger between United and Continental Airlines, Continental cease to exist and the combined company kept United as its name. Companies may also combine their names such as with the 1998 merger between Exxon and Mobil, forming Exxon-Mobil.
Acquisitions
In a standard acquisition. the acquiring company buys a majority stake in the acquired company, yet the acquired entity remains operational and continues to conduct business under its original name and structure. For example, in 2017 Amazon bought Whole Foods, but you don't go into Amazon stores to buy groceries, because Whole Foods still operates as if it is a standalone company.Now, you may wonder "what happens to my employee stock options if your private company goes through an IPO or M&A event?"
What happens to employee stock options in an M&A?
Like an IPO, M&As are also great news. There are two typical outcomes if you have employee stock options and an M&A occurs, the acquiring company can cash you out or give you company shares. If the acquiring company cashes you out, your outcome is simple: you receive cash and pay taxes on the gains. If the acquiring company decides to give you company shares, either you will receive publicly traded shares, and your situation will mimic the IPO outcome, or if acquired by a private company, you will receive private shares and you will be back in the same situation as before: waiting for liquidity.
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