ExpertCEO

I believe our company could become an M&A target within the next 12-18 months. We're 4 years old and just completed a round of funding that effectively washed out the entire team. (Long, unusually weird story.) The new pool is adequate to refresh appropriately, but I am unsure as to the board's willingness to give any vesting credit (to any or all), despite the fact that the execs and key players all have four years in and the support of the board.

Regardless, it's a safe assumption that if we were acquired in the near term that most or all of each employee's options would be unvested at that time.

Every deal is certainly negotiable and demand-driven, but assuming the acquiring company places high value on the team what are the likely outcomes for the unvested options? Do they just go away and potential new options are issued by the acquiring company? If so, do the employees lose the benefit of the current strike price?

How do I best manage this scenario?

There are lot of elements to this question. As further explanation, I refer you to the links below (within ExpertCEO), especially the first link. Here are a couple of other thoughts.

It is unusual for most employees to have accelerated vesting in case of an acquisition, but it is common for executives to have some sort of acceleration. The accleration might be based on a single or double trigger and might be 100% or might be something less (e.g. 50% of the unvested shares). Typically, these terms would be negotiated at the time of hire or the option refresh, but they could be negotiated earlier. I think it is critical for all of the executives to be treated equally in this particular matter.

Regarding your question as to what happens at acquisition, it is highly negotiable and probably also dependent on tax consequences. It seems as if the most likely scenario would be to have your options converted to options in shares of the acquiring company and you would retain the benefit of the current (presumably low) strike price. Since the terms of all of these M & A deals are unique, it's impossible to make too many generalizations. I do think it's hard to negotiate deals with your current investors absent a specific transaction that's in process with known parameters.

Your current investors will probably take the position that it's up to the acquiring company to "motivate" your employees (i.e. no accelerated vesting). Your employees might say that they've worked hard to bring value to the current investors, and that the current investors should reward them (i.e. accelerated vesting). It's all about negotiating leverage.

Others with more specific tax and legal experience may post responses, but I encourage you to see the discussions linked below.

www.expertceo.com/discussions/5-compensa...hange-of-control#423

www.expertceo.com/discussions/5-compensa...n-pool-for-employees

www.expertceo.com/discussions/5-compensa...for-early-stage-ceos

www.expertceo.com/discussions/5-compensa...ions-in-a-down-round

I think Ken captured all the key points...

From an investor standpoint, the motivations are as follows:
- Get to the highest return possible (favors minimizing dilution incurred from options and other allocations)
- Which requires having a highly capable and motivated senior management team (favors generious options, with fair vesting)
- And a highly capable and motivated employee base (ditto)
- The capitalization structure of the company does not hinder or complicate an acquisition (i.e. reduce complexity of option pool; the more unvested options the better for the acquiror)

One other tool that is available to your board (and investors) is a management carve out. These carve-outs are typically not negotiated upfront. Rather they are used at the point of an acquisition to make management "whole" depending on the specific nature/terms of the acquisition. For example, if management and employees are not adequately vested and the majority of the proceeds of a sale are going to the investors, the board can ask the investors to agree to a carve-out. In effect, the board would be carving-out a portion of the proceeds into a cash pool that is distributed to management and employees based on a formula. The formula is yet another thing to figure out. Typically it reflects the option pool allocations.

Not sure if we're really answering your question... other than to say that everything is negotiable.

If your board/investors are not being generous, it is probably a reflection on one of two things:
1. You have not been aggressive in asking
2. The board doesn't think management/employees deserve more

If the latter, each manager should seriously think about whether he/she should keep going. That is a very personal decision.

I hope this helps.

Regards,
Firas Raouf
OpenView Venture Partners
bit.ly/aIWlOQ