So, hypothetically speaking (of course) let’s say I hold X thousand stock options in a pre-IPO company. Now let’s say (hypothetically speaking) that my company is to be bought by an established public company with stocks trading in the $20 range.
Do my penny stocks automatically become $20 stocks?
Could the powers that be negotiate a different (higher/lower) fair price?
Could I be left with nothing?
Anyone have any experience? (Have you ever been experienced…)
It has happened to me. The share prices are worked out in the deal simply by taking the sale price and dividing it up equally among the shares (simplified financials here). Employees will have relatively few shares while investors may have a monster amount apiece. This is simplified of course but it is the basic idea. It doesn’t matter how much the shares were said to be worth before because they weren’t being traded. You just get your piece of the pie that your number of shares entitles you. You really are a part owner of the sold company if in a small way.
In my case, I was a pretty good employee for 3 years and didn’t get much financially out of it during that time. One day the COO called me into his office (unusual) and handed me the paperwork saying that I was the proud owner of X shares of the company. The next day, they announced the company had been sold and shortly after that, I got the paperwork to redeem my shares for a portion of the sale price. It wasn’t a tremendous amount but it helped me buy a house and take some good vacations. Lots of companies have private stock, and like anything else, it is only worth what someone will pay for it.
I should add some things because I see you were talking about stock options specifically. It is the same deal except your shares are only worth the amount over the strike price. If your options are at $10 and the company sells for $20 then you get $10 a share. If it sells for $5, you get nothing because you don’t exercise your options to owe them money. In that case, lots of people in the company would end up with different amounts per share because their options are set at different price points.
OK, I’m studying for my Series 7 exam. I hope I know this one.
You probably wouldn’t own stock options in a penny stock company. They trade either in over the counter or on pink sheets. Owning a standard contract of 100 shares of a penny stock is…umm…worthlesss. The OCC isn’t interested in options with a strike price of .001
If we are talking about employee stock options, then that is a different story. However, most of the companies which trade in this manner don’t have employees. They are simply creations designed to churn and burn the stock to make a profit.
Answer to your last question is YES. Of course, you can be left with nothing. If all you have are options that are not vested, then you have nothing to exercise at the time of the acquisition. If you have vested options, then you have the right to purchase your company’s stock, but there could be no shares for you to purchase. Another factor is how the equity ownership in your company is set up. A lot of people (like preferred investors) could be in front of the line ahead of you in getting any proceeds from a sale. At the time of the company sale, you want to own stock, not options. But even with an equity stake, as I have pointed out, you could be at the end of the line for a share of the proceeds.
OTOH, sometimes after a sale, old options get converted to new options in the new company. That’s happened to me. But I’ve gotten the shaft too.
I’ve been acquired twice in pre-IPO, and once in a publically traded company. It depends heavily on what is negotiated as part of the buyout. In the two pre-IPO cases, my options simply became options in the acquiring company. If it’s an acquisition that the pre-IPO company views favorably, and they want to keep their employees, they will probably try to negotiate as high a price as they can, and purely as a stock swap. In fact, the second time I did this, I had been tipped off by an old boss that the company was to be acquired, and she told me “If you want to come to work for us, join NOW!”. That allowed me to get pre-IPO options to be converted to the acquiring company’s shares, and get the “signing bonus” options as well.