After 25+ years of building my business, a legit buyer has offered a nice cash price, two years working for them, plus $200k in equity/stock options. I don't understand what the buyer means by the following:

"200k of options (actual value will vary based on the realized results of our investment, but the 200k will be calculated assuming a 4x return to us and co-investors). The 200k of options will have the same vesting and other terms as for all other employee optionholders."

He mentioned that it is vested at 5 years though some sort of pro-rating in prior years. I honestly cannot see me working for them beyond 2 years. But what troubles me most is the "assuming a 4x return to us..."

What could that mean? They have to grow 400% in order for me to have this?

Are they creating units and giving you 200k units? They're options, so I would interpret them to only generate value above some baseline. Probably some current financial metric. So what is the strike price or valuation metric? If your company is being sold at 4X ebitda =Y, then the options are only worth anything if they sell the company for >Y. They sound very illiquid. And I do think the vesting would tie to your employment there. So if you leave at year 2, you would only vest 40% of your units. I'd be asking a lot more questions and ask for example calculations of valuation.

Talk to your lawyer. Make sure he's got a lot of experience in this sort of thing. 200k options doesn't actually mean anything without a lot of other information.

What percentage of the company does it represent; are there any priorities/seniority in the cap table; what are the conditions under which you can exercise/obligations that come with them; what is the strike price; what are the voting rights.

If they are putting in $500k, they need to make $2 Million for you to get the $200k.

You don't have to grow 4x, but rather they have to make their money back 4x.

Whirligigs said:

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Bpriefert said:

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After 25+ years of building my business, a legit buyer has offered a nice cash price, two years working for them, plus $200k in equity/stock options. I don't understand what the buyer means by the following:

"200k of options (actual value will vary based on the realized results of our investment, but the 200k will be calculated assuming a 4x return to us and co-investors). The 200k of options will have the same vesting and other terms as for all other employee optionholders."

He mentioned that it is vested at 5 years though some sort of pro-rating in prior years. I honestly cannot see me working for them beyond 2 years. But what troubles me most is the "assuming a 4x return to us..."

What could that mean? They have to grow 400% in order for me to have this?

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Yup you get your payout but this is just a spiff - to me it's a bull**** deal - this language I'm assuming youre staying on to help transition for a time period? If so then they are locking on a pre commission rate for your labor they are buying anyways. You should ask for equity in the company if you boost revenues like that with their backend.

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Wouldn't the options be incentive to produce during the two year stay in period.

But I think options should have a fixed strike price, basically they offer you shares at a fixed price. And if the company value increases, the options are obviously worth more to you. The language is weird though.

Need more details. This vaguely looks like an earn out. You get windfall up front but more based on performance over the next years. Get an attorney that specializes in M&A (mergers and acquisitions).

Bpriefert said:

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After 25+ years of building my business, a legit buyer has offered a nice cash price, two years working for them, plus $200k in equity/stock options. I don't understand what the buyer means by the following:

"200k of options (actual value will vary based on the realized results of our investment, but the 200k will be calculated assuming a 4x return to us and co-investors). The 200k of options will have the same vesting and other terms as for all other employee optionholders."


He mentioned that it is vested at 5 years though some sort of pro-rating in prior years. I honestly cannot see me working for them beyond 2 years. But what troubles me most is the "assuming a 4x return to us..."

What could that mean? They have to grow 400% in order for me to have this?

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Bpiefert,

If you are selling your business we have a way for you to keep 99% of the proceeds.

This will avoid a huge tax hit of 30-40% or more depending on your location.

Agree with Whirlgigs. Also, when you say "a legit buyer has offered a nice cash price, two years working for them, plus $200k in equity/stock options", are you including the $200k in equity/stock options as part of the reason you consider it a "nice cash price"? If so, you might want to rework the structure of the deal to have more cash up front to where you would be ok if you don't realize any more $ from the equity/stock options. That way, you can then consider any $ you realize following the transaction as gravy. Another item, will you have a written employment agreement as part of the transaction? If not, you could be terminated at any time after you become an employee. In any event, Congratulations!

Negotiate on the Cash-in-hand and maximize that as much as possible.

Everything else is a kicker and go in with the mindset that it may not happen and you're okay with that.

None the less, with with a broker/Attorney to do the negotiations so you don't come across as the a-hole.

OP needs an attorney who specializes in private company transactions. David Cragle is a pretty good one in Dallas although he may not be taking new cases at the moment given the pending tax proposals that have most of these guys under water. He's work with several of my clients who give him high marks.

I do M&A for my company and have for 12 years. We buy family owned businesses.
Let me just say INVEST in a good lawyer and CPA. Get a lawyer for piece of mind and make sure they are tough representing you but not too much of an arse that kills the deal. Especially with tax changes that new regime will be implementing.
We are crazy busy with folks wanting to sell by end of year to avoid monster tax hit. And at this time with diligence taking a while if folks aren't at table now then deal won't close until 2022.

If you have been working for yourself that long you are NOT going to be very happy now having to work for someone. In most deals I have seen the old owner only works for 6 months after sale and then looks to get out of their lock up. 2 years is long. Be prepared to lose what benefits come from it. Also, in any deal, I always tell clients to be happy with the cash they receive at sale. They are likely to not see anymore. 95% of the time this saying holds true.