Utah Cash Award Paid to Holders of Non-Exercisable Stock Options Upon Merger or Consolidation
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FAQ
A company can set the exercise price below the prevailing market price or at a discounted price but it cannot be below the face value of the shares.
Stock options at private companies are often issued with a low strike price. This allows you a chance to buy shares for a low cost, which requires less cash up front. This is a good thing when you consider how your cash flow will be impacted by an exercise ? but this is only one thing to consider.
First is the acquiring company may buy out the options for cash. They may also offer to replace those contracts with options of the acquirer of equal or greater value. If stock options that had been granted are very far out of the money (i.e. "underwater"), however, they may be canceled.
Unvested Options ? Depending on the structure of the deal, there are three possibilities for unvested options. The holdings could be canceled, they might be converted to cash and paid out over time, or they could be converted to the acquiring company stock and subject to a new vesting schedule.
When and how you should exercise your stock options will depend on a number of factors. First, you'll likely want to wait until the company goes public, assuming it will. If you don't wait, and your company doesn't go public, your shares may become worth less than you paid ? or even worthless.
Vested employee stock options contain guarantees, so when a company is acquired employees with vested options will have some options. First is the acquiring company may buy out the options for cash. They may also offer to replace those contracts with options of the acquirer of equal or greater value.
Every stock option has an exercise price, also called the strike price, which is the price at which a share can be bought. In the US, the exercise price is typically set at the fair market value of the underlying stock as of the date the option is granted, in order to comply with certain requirements under US tax law.
If the exercise price is less than fair market value, the option most likely will violate the rules of Internal Revenue Code Section 409A. You definitely want to avoid violating 409A!
An in-the-money put option is when the exercise price is above the market price. Thus, the holder is eligible to sell the security at a price higher than what is being offered. For example, a put option with a strike price of $60 would be in the money if the market price is $45.
If a startup never goes public, the stock options that employees have may become worthless or may have limited value. Stock options give employees the right to purchase a certain number of shares in the company at a predetermined price (also known as the exercise price or strike price).