what happens to stock when a company goes private
Spotify and Dropbox are two big tech players (which nosotros use. A lot!) that are going public at multi-billion dollar valuations. Great news, right?
It may be safe to assume that going public is a good outcome for most startup founders and investors, but what does it hateful for their employees? What happens to their stock options or shares when the company goes public? Tin you get $v.two billion richer like Facebook employees did? This mail service will hash out only that.
A Quick Refresher
Before nosotros get at that place, a quick refresher on stock options. Startups utilise stock options as a class of bounty that gives their employees the right to participate in the company's success. Receiving options gives employees the opportunity to buy the company's shares at a predetermined fixed toll. If the share price increases over fourth dimension, employees tin basically buy shares at a discount since the predetermined price (exercise cost) they pay is prepare at the outset and it does not change over time.
In other words, as an employee, your potential profit comes from the increase in the company's share cost, or the company's value appreciation. The nice thing about this, is that y'all, as an early employee, can really contribute to the company's growth and make an bear on when information technology comes to its value and share price. There are plenty of things we can't control or even affect in our lives, so it'southward overnice to exist able to have some influence here.
If yous desire to learn more about option basics before continuing to read this post, check out our earlier post here .
Now, to our topic.
Equally mentioned in our Beginner's Guide to Stock Options, there are two things that must happen for y'all to plough from an selection holder to a true shareholder – the options must belong, and y'all must practise them. We volition talk over the dissimilar outcomes and treatments of your options and shares on IPO using these parameters.
Vested Options That Have Been Exercised, aka Shares
If you own shares of the company, an Initial Public Offering (IPO) is probably the optimal exit scenario y'all can hope for as an employee. There are two reasons for that. The offset reason is that IPOs are typically done from a position of strength and with favorable terms, when compared to the company being acquired by another company (not ever, but in most cases). That means that an IPO could result in a profit to many of the visitor's employees. Earlier employees will typically earn more later ones, just in general, employees should savor some piece of the pie in this scenario.
The second reason is that an IPO gives employees control on when to liquidate their shares and turn them into cash. With the exception of a lockup period, which is a catamenia of ninety-180 in which insiders (including employees) are not immune to sell their shares, you can decide what timing works for you. If y'all think the company's shares will go on to go up in value, y'all tin can proceed to hold them. If you desire out, you phone call sell them all on day 181. If you're unsure but desire to limit your take chances, you tin can just sell a portion. Since the shares are at present listed on a public exchange, you're in the driver's seat when it comes to timing.
Vested Options That Accept Not Been Exercised
You get to keep those equally if nix happened. The only matter that changes is that you now accept an actual share value to compare your strike price to, and that share value is not hypothetical since you tin sell them right abroad. If your strike price is lower than the price the company's currently trading at, you can practice your options and either hold them or sell them immediately (bold the lockup period is over).
If you have options that have vested but have yet to be exercised, the company may give you the opportunity to practice them before it goes public. This may be beneficial from a tax standpoint since you may be able to save some money if you believe that the company's value postal service IPO will exist college than its value merely before the filing. This volition also depend on the type of options you accept and your personal tax state of affairs, but information technology's worth considering since it can put some more money in your pockets.
Unvested Options
The faith of the unvested volition be determined by the visitor's stock options programme. In about cases though, nothing changes and your options will go on to vest equally long as you stay with the visitor. Once they belong, yous tin compare their strike cost to the then-current market toll and decide if it makes sense to exercise them.
One affair that'south worth checking before the company goes public is if it offers an early on-exercise option. Early do allows you to do your options earlier they vest to salvage on futurity taxes. If yous leave the company, then you'll get money back for the portion that has yet to vest. If information technology looks like the visitor is going to increase in value post IPO, you may want to accept advantage of such opportunity prior to the filing.
Planning is Central
Filing for an IPO takes a lot of planning on the company'south side. It's a huge pace in the company's life that has a major financial bear on. Similarly, employees should properly prepare for this day and brand sure they brand the most of the options and shares they've earned over their fourth dimension with the company. Planning alee and making the right decisions at the right time tin can make a large difference on how much money ends up in your pocket.
Although an IPO can many times deliver the optimal event for employees, it's non the most frequent get out scenario. Virtually exits occur when a company is caused by some other company using cash, stock or a mix of both. We will cover these scenarios in later posts.
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Source: https://blog.equitybee.com/what-happens-to-your-stock-options-and-shares-when-the-company-goes-public/
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