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There is no automatic outcome when a company is acquired. Your options may be assumed by the buyer, replaced with buyer options, paid out in cash, kept on their original vesting schedule, accelerated, or canceled. The merger agreement, equity plan and your individual grant agreement—not the word “acquisition”—determine what happens. Vested and unvested options can receive different treatment, and an underwater option may be canceled without payment.
The documents—not the acquisition label—control your result
An acquisition can be structured as a merger, a purchase of shares or assets, or another transaction. Each structure can use different equity provisions. Start with three documents:
- The transaction notice or merger agreement summary: explains the buyer’s treatment, any exchange ratio, cash consideration, withholding, deadlines and post-closing conditions.
- The company equity plan: contains change-in-control powers, definitions of “option,” permitted adjustments and cancellation rights.
- Your individual award agreement and account record: identifies whether the award is an incentive stock option (ISO) or nonqualified stock option (NSO), the exercise price, number of shares and vesting status.
A plan can authorize several outcomes without promising that every transaction will use all of them. The signed transaction documents and the instructions sent to participants determine the immediate result for your grant.
The main ways options are handled
| Possible treatment | What happens | Questions to verify |
|---|---|---|
| Assumption | The surviving or acquiring company takes over the existing award, usually with adjustments to preserve its economic value. | Does vesting continue? What entity issues the shares? Are the share count and exercise price adjusted? |
| Substitution or replacement | Your old option is exchanged for a new buyer option or another successor award. | What exchange ratio applies, and how are the new exercise price and expiration date calculated? |
| Cash settlement | The option is canceled for a cash payment, often based on the spread between deal price and exercise price for covered shares. | Is the amount before or after withholding? Which shares are included, and when is payment made? |
| Continued vesting | An assumed or replacement award remains subject to the original or revised vesting schedule after closing. | Must you remain employed? Are performance or other service conditions preserved? |
| Acceleration | Some or all unvested options vest earlier than scheduled. | Is acceleration single-trigger (at closing) or double-trigger (closing plus a qualifying termination)? |
| Cancellation | The transaction ends the award, with or without consideration if the governing documents permit it. | Does the plan require payment, and is the option in the money? |
These are possible treatments, not a prediction of what any particular buyer will choose. Filed plans from large issuers illustrate the range: one Cisco plan permits assumption, substitution, a successor cash-incentive program that preserves the spread on unvested awards, accelerated vesting, or cancellation with or without consideration. That language shows what a plan may authorize; it does not decide your transaction.
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Vested and unvested options are often treated differently
Vested options
A vested option has met its service or performance conditions, but it is not the same as a share of stock. You still need to exercise it, receive a cash settlement, or exchange it under the transaction terms. A buyer may cash out vested options at closing, convert them into successor options, or leave them exercisable for a specified period. Check whether the transaction ends the ordinary post-termination exercise window and replaces it with a shorter election deadline.
Unvested options
An unvested option can be assumed or replaced and continue vesting after closing. A transaction can also convert it into a cash incentive that preserves the existing spread and pays according to the former vesting schedule. Other documents permit acceleration or cancellation. Continued employment is frequently a condition, but the exact service requirement is deal-specific: the buyer may require you to remain employed through each vesting date, through a closing period, or until a qualifying termination.
Do not assume that an acquisition automatically vests your remaining options. Acceleration must come from the plan, grant agreement or transaction agreement. Some plans provide no acceleration; others provide partial or full acceleration only if the buyer does not assume the award or if you lose your job after closing.
Why the exercise price matters
The exercise price (also called the strike price) is what you must pay for each option share. Compare it with the transaction’s value per share:
- In the money: the deal value per share is above the exercise price. The option has a positive pre-tax spread.
- At the money: the deal value and exercise price are equal, so there is no intrinsic spread.
- Underwater: the exercise price is at or above the deal value. Exercising would not produce value at that transaction price.
In a cash-out example described in an SEC-filed transaction FAQ, the payment is calculated from the difference between the merger price and the exercise price for each covered option share, subject to tax withholding. In simplified form, an in-the-money cash amount is:
(transaction value per share − exercise price) × eligible option shares
That formula is an example, not a universal promise. Your notice may exclude unvested shares, use a different valuation, impose a cap, or provide another settlement method. Obtain the transaction-specific calculation from the equity administrator.
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How assumption and substitution work
When a buyer assumes or replaces an award, the transaction normally adjusts the number of option shares and the exercise price so the award corresponds to the merger exchange ratio. A Microsoft-filed plan exhibit, for example, describes conversion options whose share count is adjusted using a merger ratio. The actual ratio and calculation are set by the deal terms.
Read the conversion table in your notice for:
- the old and new share counts, including fractional-share treatment;
- the new exercise price and whether it is rounded;
- the new issuer and the class of shares;
- the replacement award’s expiration date;
- vesting dates, performance conditions and post-termination exercise rules; and
- any restrictions on transferring or exercising the successor award.
For qualifying U.S. ISO substitutions, Internal Revenue Code section 424 contains requirements intended to preserve statutory ISO treatment, including limits on providing additional benefits under the statutory test. A converted award is not automatically tax-free or economically identical. The award type, the transaction structure and the precise adjustment language all matter.
What can happen to unvested options after closing?
Unvested awards create the greatest practical uncertainty because their value depends on both the deal and your future service. The transaction may:
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- Keep the option alive: you continue vesting under the old or a revised schedule and later exercise the successor award.
- Replace it with a cash incentive: the buyer records the spread and pays installments when the former vesting dates arrive.
- Accelerate vesting: some or all shares become vested at closing or after a specified employment event.
- Cancel it: the plan may permit cancellation with consideration, without consideration, or only when the option is underwater.
Look for language covering a “change in control,” “assumption,” “substitution,” “replacement award,” “double trigger,” “termination without cause” and “good reason.” Confirm whether a resignation, layoff, or transfer to the buyer changes vesting or forfeiture. A promise that your job will continue does not by itself guarantee that every unvested option will continue.
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Tax treatment is transaction-specific
There is no single tax answer for all employee options. Cash cancellation and assumption or substitution can produce different results, and the analysis depends on whether the option is an ISO or NSO, when it was exercised, holding periods, withholding and the applicable jurisdiction.
Cash cancellation
A cash payment may be treated as ordinary compensation income in the type of cash-cancellation analysis discussed by a law firm, with withholding taken from the payment. That description is not individualized advice and does not establish the result for every transaction. Your payroll or equity statement should identify the amount withheld and the tax form expected.
Assumed or substituted awards
A qualifying U.S. ISO substitution may preserve ISO status under section 424 if all statutory and document requirements are met. Other conversions, including NSO exchanges, can have different consequences. Do not call a conversion “tax-free” without reviewing the award agreement, the transaction documents and current tax rules.
The $100,000 figure
A Microsoft equity-plan exhibit filed with the U.S. Securities and Exchange Commission in 2026 uses a $100,000 aggregate fair-market-value limit in its ISO designation language for options first exercisable in a calendar year. That is context-specific plan and statutory language. It is not an acquisition payout threshold, a limit on the value of your options, or a general transaction statistic. Verify current law and applicability before relying on it.
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Because tax rules vary by country and individual facts, use a qualified tax adviser for a personal calculation. An attorney can help when the plan, grant agreement and transaction notice appear inconsistent.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What to do when you receive the acquisition notice
- Inventory every award. Record ISO or NSO status, grant date, option count, exercise price, vested shares, unvested shares and expiration date. Download a statement before the old equity portal is retired.
- Read the change-in-control provisions. In the plan and grant agreement, find the sections describing assumption, substitution, acceleration, cancellation and termination of service.
- Match the notice to your records. Check the buyer’s share ratio, transaction value, cash amount, vesting treatment, withholding and treatment of fractional shares against your inventory.
- Identify every deadline. The notice may set an exercise window, election period, acceptance deadline or document-submission date. Missing it can cause the award to be canceled or settled under a default choice.
- Ask for a written calculation. Request the number of eligible shares, the exact exercise-price adjustment, gross and net cash, withholding method, payment date and post-closing service conditions from the company’s equity administrator.
- Model liquidity needs. If you must exercise, budget the exercise cost and taxes. Do not send payment until you have confirmed the approved exercise channel and deadline.
- Get personal advice where needed. A tax adviser can address ISO disqualifying dispositions, alternative minimum tax and withholding; an attorney can interpret conflicting documents or unusual forfeiture language.
Worked examples (for understanding the mechanics)
In-the-money cash settlement
Assume a notice covers 2,000 vested options, a transaction value of $18 per share and a $7 exercise price. The illustrative spread is $11 per share, or $22,000 before withholding. The actual payment could differ if the deal excludes some shares, uses a different valuation or applies another contractual adjustment.
Underwater cancellation
Assume 1,000 options have a $25 exercise price while the transaction value is $20 per share. Exercising would cost more than the deal value. If the plan permits cancellation of underwater options without consideration, the options can end with no payment.
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Replacement award
Assume the buyer issues fewer shares because its shares trade at a different value. The notice may reduce the share count and adjust the exercise price so the pre-transaction spread is addressed under the merger ratio. Vesting and expiration still need to be checked separately; an economically adjusted award is not necessarily identical in every legal or tax respect.
Questions that commonly cause mistakes
- “Acquisition means automatic acceleration.” It does not. Acceleration must be provided by the governing documents or the transaction terms.
- “Vested means already paid.” Vesting gives you the right to exercise or receive the treatment specified in the deal; it does not guarantee cash.
- “All options get the same treatment.” Vested, unvested, in-the-money and underwater awards can follow different rules.
- “The headline deal price is my option value.” The relevant value may be adjusted for the option’s exercise price, eligibility, withholding and the exact consideration mix.
- “A buyer’s option is automatically tax-equivalent.” Substitution can preserve certain U.S. ISO characteristics only when statutory and transaction requirements are satisfied.
- “An online estimate is enough.” Use the transaction notice and a written equity-administrator calculation; generic calculators cannot see your plan’s forfeiture and vesting rules.
Is one outcome more common?
No dependable general statistic establishes how often acquisitions assume, cash out, accelerate or cancel employee options. Examples from an individual issuer’s plan or a single transaction demonstrate available mechanisms, not market-wide frequency. Treat any claim that one treatment is “standard” as incomplete unless it identifies the transaction structure and documents behind the claim.
Bottom line for employees
Determine four things first: whether each option is vested, whether the deal value exceeds its exercise price, whether the buyer is paying cash or issuing a successor award, and what tax and deadline rules apply. Then reconcile the merger notice with the plan and grant agreement and obtain the calculation in writing. The acquisition itself does not answer those questions; the controlling documents do.
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