Is it Normal for Options to be Converted into RSUs During an Acquisition?

Yes, this is standard practice in the M&A world, especially for tech companies and startups being acquired by larger, public companies. An RSU (Restricted Stock Unit) is basically a promise from your company to give you actual shares of stock after you’ve worked there for a certain period. 

Think of an RSU as an IOU for stock with strings attached:

• Promise of real shares: Unlike options, you don’t buy anything - you just receive actual stock when they vest

• Time-based restrictions: You get the shares only after staying at the company for the required time (vesting)

• Guaranteed value: Even if the stock price drops, RSUs still have value (unlike options that can go underwater)

Why This Happens:

• Simplification: The acquiring company often wants to standardize all equity compensation under their own plan

• Valuation certainty: RSUs have inherent value while options may be underwater or have complex valuation

• Retention tool: RSUs typically have time-based vesting that helps retain key employees post-acquisition

The conversion typically follows a formula based on:

• The acquisition price

• The strike price of your existing options

• Sometimes a retention multiplier

For example, if you have 1,000 options with a $5 strike price, and the company is acquired at $15 per share, the “spread” is $10 per option. This $10,000 value might be converted to RSUs in the acquiring company based on their stock price.

Note that after the conversion, vesting schedules often reset or are modified, and the tax treatment changes (options and RSUs are taxed differently), so you’ll want to consult your tax advisor for specific guidance here.