Scotia Wealth Management on Equity Compensation Planning for Executives Facing a Deal

What happens if a deal vests your awards and ends your paycheck?

If your company is acquired, the award agreement decides whether unvested awards turn into shares at closing. Single-trigger awards vest when the deal closes. Double-trigger awards vest only if you are also let go, or resign for good reason, within the protection period. The number you've just noticed on a projection, a vesting schedule that looks too generous or a tax estimate that looks too small, usually traces back to that one clause.

Many executives assume a change in control converts every unvested award into cash at closing. The rule is narrower. Take Andre and Gwen, 52 and 50: he is CFO of a mid-size healthcare services company that may be acquired, she runs a small nonprofit, and their twins start college next fall. Andre's company agrees to a sale, and his $1.5 million of awards vest at closing as acquirer shares (hypothetical, round numbers). Assume 37 percent federal tax covered by withheld shares, before state tax, for illustration. That is $1.5 million × 0.37 = $555,000 to tax, leaving $945,000 of shares in his account.

Their $2 million portfolio already holds $400,000 in healthcare funds, so the sector becomes $1,345,000 of $2,945,000, about 46 percent. They then sell $560,000 of the new shares soon after closing to cover four years of tuition at $140,000 annually. Because the basis of those shares equals their value at closing, the sale creates little gain. Healthcare drops to $785,000 of a $2,385,000 portfolio, about 33 percent. Share prices can fall between vesting and sale, and any investment can lose value, so the speed of that sale matters.

Once Andre's salary stops, Gwen's nonprofit pay covers only part of the monthly spending. The roadmap names which pile pays each month: the tuition reserve first, then the newest high-basis share lots, while Andre's 401(k) stays untouched. At 52 he is too young for penalty-free access, and the age-55 separation exception would not apply to him.

Before Scotia Wealth Management suggests trimming the healthcare funds already in the $2 million portfolio, it estimates the capital gain on each lot. Funds with small gains and heavy overlap go first. The bond holdings already work, so we leave them alone. A second opinion shouldn't turn into a rebuild.

When does Scotia Wealth Management revisit your equity compensation planning?

We recheck the roadmap once each year, once your year-end stock plan statements and Form W-2 are in hand. Five events trigger an earlier look: a signed merger agreement, a new grant, a trading window opening after earnings, a job loss, or a post-deal lockup ending. Each one changes which shares you can sell and when, so a schedule drafted before the event is probably wrong afterward.

If the award terms themselves need a lawyer or a CPA

This service can't renegotiate award terms, severance or a parachute cut-back clause; an employment lawyer does that. It also doesn't prepare returns or AMT calculations, which belong to your CPA. The golden parachute excise tax is covered on its own page. If you hold a small amount of vested stock and have no grants left to vest, this level of work may not pay for itself yet.

Before you let anyone plan around your grants

Plenty of executives believe any advisor can read a grant. Many can't, and a misread grant usually ends in a tax bill. Picture Andre budgeting the twins' first $140,000 tuition bill from a change-in-control payout, then learning from the merger proxy that the awards are double trigger. They roll into acquirer awards on the old schedule, so the tuition has to come from selling older holdings. If half of that $140,000 sale price is gain over basis, the sale realizes $70,000 of capital gain in that same year.

When you need cash from company shares, sell the most recently vested lots first. Each of those lots carries a basis set at its value on the day it vested, so selling soon afterward creates little taxable gain unless the price has moved. Gather the documents below before any review. The change-in-control clause is the row that decides everything else, because it sets whether the rest of the schedule starts at closing or years later.

• Ask whether they have read a change-in-control section and can tell you, from your own documents, whether your awards are single or double trigger.
• Ask how they choose which share lots to sell first, and whether they track basis lot by lot from each vest date or only by an average.
• Ask how their sale schedule fits your trading windows and any 10b5-1 arrangement; the 10b5-1 setup itself is a separate service.
• Ask how they are paid on shares you keep versus shares you sell. At Scotia Wealth Management, every fee is one you have read and signed off on beforehand.

When does each decision land, from first call to finished roadmap?

The work runs four to six weeks, and you make one decision at each stage. Nothing is sold during the review itself. Scotia Wealth Management clients get reviews held online or by phone, and the minimum is $500K in investable assets.

• First call: you decide whether to send the award agreements and the most recent stock plan statement.
• Weeks one and two: we gather the employment agreement, the merger proxy if one exists, and lot-level basis; you decide what to share with your CPA.
• Weeks three and four: we draft cash flow and a sale schedule; you decide the size of the tuition reserve and which lots fund it.
• Weeks five and six: you receive the finished roadmap plus notes for your CPA and lawyer; you decide what to act on now and what waits for closing.