What Happens to My RSUs if My Company Is Acquired?

Restricted Stock Units (RSUs) are a common form of equity compensation, granting employees a promise to receive company shares once specific vesting conditions are met, typically over time. When the issuing company is acquired, this event can significantly alter an employee’s equity holdings. This article details the typical outcomes for RSUs during an acquisition.

Treatment of Unvested RSUs

When a company is acquired, unvested Restricted Stock Units (RSUs) held by employees face various outcomes, determined by the RSU grant agreement and acquisition terms. One common approach is accelerated vesting, where shares become fully owned sooner than their original schedule. This can occur in a “single-trigger” scenario, where all unvested RSUs vest immediately upon the acquisition’s closing.

Another form is “double-trigger” acceleration, requiring two events for vesting: the acquisition itself and a subsequent involuntary termination of employment within a defined period. This structure aims to protect employees who might be laid off post-acquisition, while also serving as a retention tool for the acquiring company. Double-trigger vesting can help manage tax implications by deferring the vesting event until employment continuity is uncertain.

Alternatively, unvested RSUs may be converted into equivalent equity of the acquiring company. The acquiring company replaces the target company’s RSUs with its own equity, and the original vesting schedule often continues. This maintains the employee’s equity incentive with the new entity, often with an adjusted number of shares or units based on the acquisition’s valuation.

Forfeiture remains a possibility for unvested RSUs if certain conditions are not met, such as employment continuity clauses. If neither acceleration nor conversion occurs, and an employee’s service is terminated before vesting requirements are satisfied, the unvested RSUs may be canceled without compensation. However, in many acquisitions, some form of acceleration or conversion is negotiated to retain talent.

Methods of RSU Settlement

Once RSUs have vested, whether through their original schedule or accelerated due to an acquisition, their value must be settled. A common method is a cash buyout, where the acquiring company purchases the underlying shares for cash at the agreed-upon acquisition price, providing immediate liquidity.

Another method is a stock-for-stock exchange, where vested RSUs are converted into an equivalent number of shares or RSUs in the acquiring company. This allows employees to maintain an equity stake. The conversion rate depends on the agreed-upon valuation of both companies’ stock. This method can be part of a tax-deferred reorganization, depending on the deal’s structure.

In some acquisitions, a mixed consideration approach combines cash and stock for vested RSU settlement. Employees might receive a portion of their RSU value in cash and the remainder in shares of the acquiring company. This offers a balance between immediate liquidity and continued equity participation.

Settlement for vested RSUs typically occurs quickly after the acquisition closing, with the exact timeframe stipulated in the acquisition agreement. Whether through cash, stock, or a combination, the settlement process ensures employees realize their equity compensation’s value.

Tax Considerations

The tax treatment of Restricted Stock Units (RSUs) during an acquisition primarily revolves around the vesting event. When RSUs vest, whether on their original schedule or through acceleration, the fair market value (FMV) of the shares at vesting is considered ordinary income. This income is subject to federal, state, and local income taxes, as well as employment taxes like Social Security and Medicare. Employers typically report this income on an employee’s Form W-2, similar to regular wages.

The value reported as ordinary income at vesting establishes the cost basis for the shares. This prevents double taxation on the same value. For example, if shares vest at $50 per share, that $50 becomes the cost basis. When these shares are subsequently sold, any difference between the sale price and this established cost basis will be treated as a capital gain or loss. If shares are sold immediately upon vesting, there is typically little to no capital gain or loss, as the sale price is close to the cost basis.

If shares are held after vesting and later sold, the holding period determines whether any gain or loss is short-term or long-term capital. Shares held for one year or less after vesting result in short-term capital gains or losses, taxed at ordinary income tax rates. Shares held for more than one year after vesting qualify for long-term capital gains or losses, taxed at lower, favorable rates. This distinction can significantly impact the overall tax liability.

For cash buyouts of vested RSUs, the cash received is generally treated as ordinary income up to the vesting value, with any excess over the basis (if shares were held post-vesting and appreciated) treated as a capital gain. In a stock-for-stock exchange, if the exchange qualifies as a tax-deferred reorganization, there might be no immediate tax implications for the exchange itself. However, the initial vesting event still triggers ordinary income tax on the shares’ FMV. The new shares received in the acquiring company generally carry over the basis from the original shares.

Tax reporting for RSU income and sales involves several forms. Ordinary income recognized at vesting is reported on Form W-2. When vested shares are sold, the transaction is reported on Form 1099-B by the brokerage, providing details for calculating capital gains or losses. This information is then used to complete Form 8949 and Schedule D of your tax return. Accurately tracking the cost basis helps avoid overpaying taxes.