What happens to employees when a company goes public or gets acquired

The two biggest events in a company's life, from a shareholder's view, are going public and being sold. Both are exits, where early owners turn their stake into money. For employees, both are the moment when decisions made far above them arrive at their desk.

Going public

An IPO means the company sells shares to the public and lists on an exchange. From the inside, a few things change at once.

Your equity becomes real, because RSUs at private companies often have a "double trigger": they don't fully vest until both your time is served and the company goes public. At IPO, everything that's been accumulating vests together, and you owe income tax on all of it, at the IPO price, whether or not you sell. People have gotten six-figure tax bills on shares that fell by half before they could sell.

You usually can't sell for a while. Nearly every IPO has a lockup, typically 180 days, during which employees and insiders can't trade. The stock can move a lot in six months. Many of the companies that went public in 2021 were down 50 to 80 percent by the time their lockups expired.

The company starts reporting quarterly, so the pressure described in the previous post now applies. Spending that was fine at a private startup gets scrutinized and hiring slows or reverses. The first post-IPO layoffs are common enough that people plan for them.

Getting acquired

An acquisition is when another company, or a private equity firm, buys yours. Shareholders vote on it; employees don't.

Your equity is handled according to your grant agreement's change-of-control terms, which almost nobody reads until this moment. Unvested equity can be converted into the buyer's stock on the same schedule, cashed out or cancelled. "Single trigger" acceleration means everything vests on the sale. "Double trigger" means it vests only if you're also let go within a window after the sale. Most companies use double trigger or nothing. Find out which you have before you need to.

Then come the redundancies: two companies have two HR departments and two finance teams. After the deal, there's one of each. Buyers announce "synergies," and synergies are mostly people. When Elon Musk bought Twitter in 2022, headcount went from about 7,500 to about 2,000 within months. That's an extreme case; a more ordinary one cuts 10 to 20 percent of the acquired company over a year or two, weighted toward overlapping functions.

Private equity buyouts

A leveraged buyout is a specific kind of acquisition where the buyer borrows most of the purchase price and puts the debt on the company being bought. The company now has to earn enough to pay interest on money that was used to buy it. That usually means cutting costs, and labor is the largest cost at most companies.

Toys R Us was bought this way in 2005 by Bain Capital, KKR and Vornado for $6.6 billion, about $5 billion of it borrowed. The company spent the next decade paying roughly $400 million a year in interest, couldn't invest in its stores and filed for bankruptcy in 2017. About 33,000 people lost their jobs when it liquidated in 2018. Employees got no severance until a public campaign shamed the firms into a $20 million fund.

Plenty of buyouts end better than that, and the debt is still there in every one of them, and it limits what the company can afford.

What to ask, and when

The time to ask is before the offer, or at least before the announcement.

• What happens to unvested equity on a change of control? Single trigger, double trigger or nothing?
• Is there a severance policy, and is it written down?
• Are there retention bonuses for staying through a transition?
• For a private company: who are the investors, and how long have they held? Venture funds typically need an exit within ten years of investing.

How this compares

At a worker cooperative, selling the company requires a vote of the members. Whether to sell, to whom and on what terms is decided by the people who would be affected. At an ESOP company, the trust that holds employee shares gets paid like any shareholder when the company sells, so employees see the money even if they don't get the vote.

Both are rare, and at most companies the sale is announced in an all-hands meeting, after it's done.