What Happens To Stock Options When A Company Goes Private

Over the past few years, the number of companies that have gone private has been on the rise. Going private refers to the process of converting a public company into a private one. By doing so, the ownership of the company transfers to a few individuals or entities including the company’s founders, investors, and other stakeholders. When a publicly listed company goes private, the stock options held by its employees and/or founders also undergo a significant change.

Stock options are unique, as they come with certain entitlements that are not available with other types of investments such as stocks, mutual funds, and bonds. They give employees the right to buy and sell company stock, often at a discounted rate. As an employee, the holder of a stock option, you can benefit from price fluctuations in the stock market. This potential for appreciation is one of the primary reasons why stock options have been popular among employees.

So, what happens to stock options when a company goes private? Generally speaking, when a publicly traded company goes private, the company’s stock options are usually extinguished or converted into restricted shares. Employees can also choose to buy the stock at the prevailing market price. However, this is not a viable option for most employees, as their personal financial situations might not permit it. It is also important to note that while publicly listed companies typically provide more liquidity to their employees, going private means the opposite – it can be difficult to convert the stock options into cash.

Another issue to consider is the tax implications of going private. Since stock options are taxed as income when exercised, there may be a large tax liability when the company goes private and the options are converted. It is important to consult a qualified tax advisor to ensure that any gains or losses resulting from the conversion are reported accurately to the IRS.

Employees that hold stock options from a company that is looking to go private will have to make decisions about what to do with their options. It is important to understand all the implications of going private and to research the specific stock option terms so that a well-informed decision can be made. It is equally important to understand the value of the stock options, as the holders may not have time to wait for appreciation.

It is also essential to keep in mind that even if the decision is made to keep the stock options, there is no guarantee of success for the company once it goes private. Companies going private often face longer-term challenges and the stock options may not appreciate, or may even depreciate in value.

In conclusion, it is important to understand what happens to stock options when a company goes private. Employees should take their time to understand the tax implications and do their research when deciding what to do with their stock options. There is no easy answer and it is important to make an informed decision.

What Are the Common Reasons Companies Choose To Go Private?

Companies typically go private for a variety of reasons. The most common reasons are to avoid public scrutiny, to reduce transactional costs associated with going public, to protect confidential information, or to pursue different strategies that would be difficult to facilitate in a public setting.

For instance, when a company is public, shareholders may be looking for short-term gains and this can often lead to pressure on management to constantly increase profits. Going private gives companies the freedom to pursue a long-term strategy and focus on building value instead of worrying about meeting short-term goals set by shareholders.

It is also important to consider that going private is not a risk-free endeavor. It often involves engaging a significant amount of financing and significant debt that can be difficult to manage in a stable economic environment, let alone a recession.

Lastly, the decision should not be taken lightly, as it can have significant consequences. Companies should carefully evaluate the pros and cons of going private and consult experts to understand the full implications of the decision.

How Can Employees Receive Compensation When a Company Goes Private?

When a company goes private, the employees may receive some form of compensation as part of the process. This could take the form of a lump-sum payment, shares of the new company, a bonus, or options. It is important to note that the amount of compensation may vary based on the employee’s individual circumstances.

The compensation offered by the company should be evaluated carefully, and employees should compare the terms of any offer to the terms available in the public market. For example, a company may offer stock options with a 10-year vesting period, while in the public market the vesting period may be shorter.

It is also important to consider any tax implications of the compensation received. Any gain or loss resulting from the sale of the stock options should be reported accurately to the IRS. Consulting a qualified tax advisor may be necessary to understand all the details.

What Are the Alternatives to Stock Options for Employees?

Employees may have a difficult time converting their stock options when their company goes private, or when their stock option terms are not favorable. Fortunately, there are alternative ways for employees to receive compensation. Equity-based compensation plans are becoming increasingly popular, as they can provide employees with more flexible options.

For instance, companies may choose to offer restricted stock units instead of stock options. These units can be granted to employees and then vested at predetermined intervals, allowing the employee to benefit from the appreciation of the company’s stock price without having to buy the stock up front. These units can also be sold if the employee chooses to do so.

Equity compensation is also a great way to attract, retain, and reward employees. Companies should consider all the options available, as there may be more attractive terms than those offered by traditional stock options.

What Are Some Things to Consider Before Taking on Stock Options?

Before taking on stock options, there are several important factors to consider. First, it is important to understand the terms of the options and how they may change along with the company’s stock price. Understanding the potential risks, tax implications, and corporation laws will help you make a well-informed decision.

It is also essential to consider that stock options can be difficult to cash out when the company goes private or when the employee leaves the company. Therefore, researching the stock option terms is important before investing in them. Employees should research the terms of the stock options to understand the upside and downside of the investment.

Finally, if the company is looking to go private, it is important to understand the implications of the process on the stock options and the compensation being offered. Employees should evaluate the compensation they are receiving to ensure that it is fair and equitable.


Overall, stock options can be great investments for employees, but it is important to understand all the implications before taking them on. When a company goes private, the stock options generally go with it and employees may have to make decisions about what to do with their stock options. Carefully researching the terms and understanding the tax implications is essential in order to make a well-informed decision. Look into all alternative forms of compensation as well, such as restricted stock units.

Wallace Jacobs is an experienced leader in marketing and management. He has worked in the corporate sector for over twenty years and is a driving force behind many successful companies. Wallace is committed to helping companies grow and reach their goals, leveraging his experience in leading teams and developing business strategies.

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