What Happens to Stock Options When a Company Is Acquired

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

When a company is acquired, your stock options are handled exactly as the merger agreement and your company’s equity plan say, and there are four usual outcomes: the buyer assumes or converts them into its own options, they are cashed out for the spread (deal price minus strike price), unvested options vest early (acceleration), or they are cancelled. Vesting does not speed up automatically just because a deal is announced. Underwater options, where the strike price is above the deal price, are often cancelled for nothing.

For a two-income household earning $750,000 to $3 million in California or Washington, the bigger surprise is usually tax. A cash-out of options is taxed as wages in the year of closing, withholding is often far below what the family actually owes, and a single deal can push a year’s income well past $1 million.

The four outcomes, and who decides

You do not choose the outcome. The acquirer and the target company negotiate it, and the result is written into the merger agreement, which must fit what your equity plan allows. You will usually learn the treatment from an employee notice or FAQ a few weeks before closing. The four outcomes:

Many deals mix these: vested in-the-money options are cashed out, unvested options are assumed, and underwater options are cancelled.

Does an acquisition make stock options vest?

Only if your documents say so. Most plans give the board discretion, and many let the buyer assume unvested options so they keep vesting on the original schedule. Acceleration usually comes in one of two forms:

• Single trigger: vesting speeds up at closing, whether or not you keep your job. Less common for rank-and-file employees, more common in executive agreements.
• Double trigger: vesting speeds up only if the deal closes and you are terminated without cause (or resign for “good reason”) within a set window afterward. This is the common version at larger companies.

If the buyer refuses to assume the options and the plan does not require a cash payment, unvested options can simply be cancelled. That is why the plan document and grant agreement matter more than anything you hear in a town hall.

How a cash-out is taxed in California and Washington

A cash payment for cancelling a vested nonqualified stock option (NSO) is compensation. It shows up on your W-2, is subject to income tax withholding, Social Security tax (up to the 2026 wage base of $184,500) and Medicare tax, and is taxed at ordinary rates, not capital gains rates. An incentive stock option (ISO) that is cashed out rather than exercised also produces ordinary compensation income; the favorable ISO treatment only applies when you exercise and then hold the shares at least two years from grant and one year from exercise (IRC §422(a)(1)).

Federal withholding versus the tax you owe

For 2026, employers may withhold federal tax on supplemental wages such as option cash-outs at a flat 22%, and must withhold 37% on supplemental wages above $1,000,000 in the calendar year (IRS Publication 15, 2026). For 2026 the 37% bracket for married couples filing jointly starts at $768,700 of taxable income (Rev. Proc. 2025-32). A household already earning $900,000 is taxed at 37% on every extra dollar, so 22% withholding leaves a large balance due.

California

California taxes the cash-out as ordinary income. For 2025 (the latest schedules the FTB has published), the joint 11.3% bracket runs from $891,542 to $1,485,906 and 12.3% applies above that, plus the 1% Behavioral Health Services Tax on taxable income over $1,000,000, for a 13.3% top rate (FTB 2025 rate schedules). California has no lower rate for capital gains. State Disability Insurance also takes 1.3% of all wages in 2026 with no wage cap (EDD). When employers withhold California tax on stock option and bonus payments at the supplemental flat rate, the rate is 10.23% (EDD California Employer’s Guide, DE 44, 2026), which is below the top marginal rate.

If you moved out of California after the options were granted, California can still tax part of the income. The FTB’s stated method allocates it by the share of your workdays spent in California from the grant date to the exercise date, or to the date your employment ended if earlier (FTB Publication 1004).

Washington

Washington has no individual income tax on wages in 2026, so a Bellevue or Seattle family pays federal tax and Medicare tax on the cash-out but no state income tax. The cash-out is compensation, not a capital gain, so Washington’s capital gains tax (7%, or 9.9% on taxable gains above $1,000,000) does not reach it; gains on shares you already owned can be subject to it once they exceed the annual standard deduction ($278,000 for 2025, the latest published) (WA DOR). This changes from 2028: Washington has enacted a 9.9% income tax on individuals and joint filers with adjusted gross income over $1,000,000, effective January 1, 2028 (WA DOR income tax). A deal that closes in 2028 or later will look different for high earners.

Worked example: a $900,000 California household with a cash-out

Assumptions (illustrative, married filing jointly, 2026 federal figures, 2025 California brackets):

• A biotech scientist in South San Francisco and a physician spouse. Taxable income before the deal: $900,000.
• The scientist holds 20,000 vested NSOs with a $15 strike and 10,000 unvested NSOs with the same strike. The deal pays $55 per share in cash.
• Earlier in the year the scientist already received $300,000 of RSU and bonus income taxed as supplemental wages.
• Social Security wages are already above the 2026 wage base, so only Medicare tax applies to the payout.

Vested options, cashed out. Spread: 20,000 x ($55 minus $15) = $800,000 of W-2 income.

The family keeps roughly $375,000 of the $800,000 and faces a gap of about $122,700 between what was withheld and what is owed. Without an estimated payment in the quarter the deal closes, that gap can also carry an underpayment penalty.

Unvested options, three possible outcomes. The 10,000 unvested options carry a $400,000 spread at the deal price.

• Assumed: if the buyer’s stock trades at $110 and the exchange ratio is 0.5, they become 5,000 buyer options with a $30 strike. The spread is still $400,000 (5,000 x $80), with no tax until exercise, but it now rides on the buyer’s stock price.
• Single-trigger acceleration and cash-out: another $400,000 of wages in the same year, taxed at the same top rates as above.
• Double trigger: nothing happens unless the scientist is let go within the protection window, at which point the options vest.

If the unvested options are assumed, the family’s net worth is now more concentrated in one stock, often the same employer that pays both the salary and future RSUs. That is a risk decision, not just a tax one.

ISOs, private companies and exercised shares

ISOs that are assumed can keep ISO status if the substitution follows the Treasury rules, broadly that the exchange ratio preserves the ratio of strike price to share value and the spread is not increased (Treas. Reg. §1.424-1). Check your new grant notice to confirm how the options are classified.

Shares you already exercised are treated like any other shareholder’s stock. In a cash deal you have a sale: capital gain for NSO shares (measured from the value at exercise) or, for ISO shares sold before the two-year and one-year holding periods, a disqualifying disposition that turns part of the gain into ordinary income. In a stock-for-stock deal, the exchange may be tax-deferred if the deal qualifies as a reorganization; the deal documents will say.

Private companies add a few wrinkles. Part of the price is often held back in escrow for a year or more, or paid later as an earnout if targets are hit, so the headline number and the cash you receive at closing differ. If you early-exercised and filed an 83(b) election, your shares may already have a long holding period (see our guide to the 83(b) election letter). If the shares qualify for the federal QSBS exclusion, remember California does not follow the 2025 federal expansion of QSBS (FTB 2025 Form 540 booklet), so California residents should expect state tax on the gain. For RSU holders at private companies, see RSUs for private companies.

Executives: acceleration and the golden parachute tax

Accelerated vesting is generally treated, at least in part, as a payment “contingent on a change in control.” If an officer’s or large shareholder’s total change-in-control payments reach three times their base amount (roughly their average annual compensation over the prior five years), the excess over one times the base amount is an “excess parachute payment” (IRC §280G). The recipient owes a 20% excise tax on that excess on top of income tax (IRC §4999), and the company loses its deduction. If you are a senior leader, ask whether your agreement cuts payments back to stay below the threshold or pays the full amount.

The decisions the family actually has to make

1. Read the notice against the plan. Confirm which options are cashed out, assumed or cancelled, and at what price and ratio.
2. Exercise before closing? Occasionally a deal lets you exercise vested options before closing. Exercising NSOs right before a cash deal usually gives the same tax result as a cash-out, so the question is rarely worth it. For ISOs it can matter; model it first.
3. Fund the tax gap. Make a federal and California estimated payment in the quarter of closing, or raise W-4 and DE 4 withholding on remaining paychecks.
4. Decide what to do with the cash and any new options. Set a target for how much of your net worth sits in the buyer’s stock, and a schedule for reducing it. Our note on what happens to your stock when a company sells covers shares you already hold.
5. Check your job protections. If you have double-trigger vesting, know the window and what counts as “good reason.”

Common mistakes

• Assuming the 22% federal withholding covers the bill. At these incomes it rarely does.
• Treating a cash-out as a capital gain. It is wage income, and in California there is no lower rate on gains anyway.
• Forgetting escrow and earnouts when planning spending. Part of the money may arrive a year or two later, or not at all.
• Letting assumed options quietly grow into a large, single-stock position.
• Missing a pre-closing exercise window for ISOs or early-exercised shares because the email came during a busy week.

What to write down for your kids

An acquisition is one of the few times a family gets a large, visible windfall. Your children will remember that it happened; they are less likely to know why you paid the tax the way you did, how much you kept, what you set aside, and why you sold the new stock instead of holding it. A one-page Decision Memo in your FamilyKnowledge® Library, written the month the deal closes, captures that reasoning while it is fresh. As Kevin Luu, Co-Founder and Chief Learning Officer, puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Frequently asked questions

What happens to unvested stock options in an acquisition?

It depends on the merger agreement and your plan. Most often the buyer assumes them and they keep vesting on the original schedule, now as options on the buyer’s stock. Some deals accelerate them at closing (single trigger) or only if you are terminated afterward (double trigger). If neither the buyer nor the plan provides for them, unvested options can be cancelled without payment.

What happens to underwater options when a company is acquired?

Options whose strike price is above the deal price have no spread, so in a cash deal they are usually cancelled for nothing. In a stock deal they may be assumed and converted at the exchange ratio, staying underwater unless the buyer’s stock rises. There is no tax when an underwater option is cancelled, and no deduction either.

Is an option cash-out taxed as a capital gain?

No. A payment for cancelling an option is compensation, reported on your W-2 and taxed at ordinary income rates. For 2026, the federal rate for joint filers is 37% on taxable income over $768,700, and in California the payout also carries state income tax and 1.3% SDI. Only shares you had already exercised and held can produce a capital gain.

Next step

When the deal notice arrives, list every grant with its type, strike price, vested and unvested count, and the treatment the notice describes, then estimate the tax gap before closing. If you would like a second set of eyes on that list, our tax management and investment risk management teams at Age Five Family Office™ can walk through it with you as part of a Tax & Wealth Assessment.

This is general education, not individual tax advice. The right move depends on your family’s full picture and your deal documents.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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