In 2018, there were more than 15,000 mergers and acquisitions of public companies in North America, according to the IMAA Institute. The 10 largest were valued at $72 billion and up. As for private companies, in a given year thousands of private business owners sell their companies. If you work for a company being sold or acquired, many things could be at stake— including your financial security.
Consider these two scenarios:
► The small but successful financial software firm where you work is seeking to have its initial public offering (IPO) in several months. You’re a senior manager at this company and have been offered incentive stock options. You can exercise them early or wait until after the IPO. If you wait, you can’t sell during the 180-day lockup period—and you don’t even know right now how much stock you could sell at one time. Deciding what to do could have major implications on your wealth accumulation and tax situation. While your company going public is the holy grail of start-up success—you’ve arrived! —you’re suddenly faced with decisions you’ve never had to make before.
► The large public company where you work is being acquired by an even larger competitor. You’ll be offered 1 share of stock in the new company for every share of stock in your company that you own. You’ll also receive cash compensation for each share of your company you own. And, you’ll receive something called a contingent value right (CVR) for each share you own—a future “bonus” of cash if and when the merged companies hit a future milestone. Of course, you have no way of knowing pre-acquisition how much your new stock will be worth—that depends on the market’s view of the new entity’s future earnings prospects. Complicating matters further, you’re not even sure you’ll have a job with the new entity. You may be offered a severance package. Like your counterpart in the small company having an IPO, you have a lot of decisions to make.
First, Take Account
It’s important for you to take some time and sit down with your advisor to review all your compensation—salary, benefits, annual bonus, stock in your current company, and any non-qualified deferred compensation plan. A thorough analysis of your current financial situation can help you understand where the new event fits in—and what adjustments you might have to make. What if you suddenly receive $1 million before taxes from that IPO? Is that a dream come true or a nightmare about to unfold? What if the stock you receive in a merger drops significantly after the deal closes?
Next, take stock of what you may receive. You’ll likely have many questions: What does the equity I’m going to receive represent in my overall financial picture? When will it be taxed—and can I change that? What are the financial planning implications? Keep in mind that equity in a company can often be a significant opportunity to build wealth for the long-term. In the meantime, however, you have to fund your current lifestyle, pay taxes, and save for your own retirement.
If you work for a small start-up firm, you may have been given restricted stock. It’s a pure grant of company stock; you don’t own the stock until all restrictions lapse (“restrictions” are up to a company to define—a common one is continuing to work for the firm a number of years). Dividends on restricted stock, however, typically are paid during the holding period, which results in income to you. At vesting, restricted stock results in ordinary income but future appreciation in the value of the stock after vesting is taxed as long-term capital gains. The recipient of restricted stock may make an “83(b) election” (under IRS regulations) to recognize
the income from the restricted stock grant based on the fair market value of the restricted stock at the time of the grant, rather than at the time of vesting.* This election may minimize your income tax liability but is a complex decision that requires the guidance of your advisor. You may also have been given performance shares, which generally vest to you only if a company performance goal is met.
If you work for a public company that is merging with or being acquired by another public company, you’ll likely be given shares of stock in the “new” company. It could be a 1-for-1 agreement, a 2-for-1, or a combination of stock and cash. Once the merger closes, the shares of your previous company stop trading. The price of the shares of the “new” company may fluctuate depending on the market’s view of the prospects for a smooth integration and its future earnings.
If you’re a senior manager or executive in a merged public company or one that has recently gone public, you’ll be subject to rules under Section 16 of the Securities Exchange Act of 1934, which require “insiders” (officers, directors and beneficial owners of more than 10% of a company’s stock) to file forms and follow rules on trading in their companies’ securities.
Put This One-Time Event in Context
Your total compensation is made up of many things and it’s important that you discuss with your advisor how it affects your:
– Cash-flow planning: what are your short- and mid-term goals for which you’ll need liquidity?
– Investment diversification: how much of your wealth, and your risk, will be tied up in your company stock?
– Tax liability: when you sell shares it’s no longer a theoretical exercise, it’s a real event with tax implications
– Estate planning: for example, can you gift restricted shares?
If you expect that you may lose your job and be offered a severance package after your company merges with or is acquired by another, take a deep breath and make the call to your advisor. A severance package isn’t just about how many months’ of pay you’ll receive—it also covers continuation (or not) of health, life, and disability insurance and may include perks (free help with finding another job) or restrictions (agreeing not to disparage the company or share
trade secrets with competitors). Your severance package needs a second set of eyes on how it fits in the total context of your financial picture—your advisor can help.
Remember that financial planning is mostly about planning. That includes examining your current picture of wealth and how events that may impact you today may change your picture 5 or 10, or more, years down the road. Your company’s IPO or merger with another company is out of your hands, but how you prepare for and respond to is not.
*Restricted stock: the tax impact on employers and employees, grantthornton.com