Startup employees can still sell their stock if their company goes public through a SPAC. But the rules may be different, experts say

By Melia Russell

If someone gets hired to work at a startup, they’re probably going to end up with stock options as part of their pay. That company’s stock can be valuable if it goes public or gets bought at a price per share well above the strike price of the options.

But what happens if the company merges with a special purpose acquisition company, or SPAC?

It’s a growing consideration for startup workers as the number of SPACs quadrupled in 2020 from the year before, according to SPAC Insider data. Already this year, the number has beaten 2020’s record with 312 SPACs that have raised more than $101 billion.

Employees need to know that a company’s process of going public through a
SPAC doesn’t have a material affect on how they sell their shares on the public markets, but they should ask a few key questions so they can plan ahead, experts say.

“Whether the company does a traditional IPO or does a SPAC, the outcome for the employee is essentially the same,” Craig Sherman, a partner at law firm Wilson Sonsini, tells Insider. “The mechanics are slightly different.”

Today, most blank-check companies are formed by private equity firms and individual investors that sell shares on the public markets, typically at $10 apiece. That money sits in a trust while the so-called sponsor looks for a company to buy.

After the SPAC finds the right company to take over and merges with it, the private company starts trading shares as the publicly-traded firm, effectively going public and, often, raising money or cashing out investors in the process.

In the merger, the options of the operating company are converted for options of the public company, Sherman said. There’s sometimes an exchange ratio, meaning the numbers of shares an employee holds might look different after.

Typically when a company goes public, employees are forced to hold onto their shares until a certain date in order to prevent a massive sell-off when the stock starts trading. This is called a lock-up period, and with a traditional IPO, it usually lasts 180 days. But that time could vary in SPAC mergers.

“In the case of a SPAC merger, the rules around lockup periods aren’t as hard and fast as they are with an IPO,” Charly Kevers, CFO of Carta, a startup whose service helps private companies manage their equity awards, said in an email.

The details are worked out between the startup company and the SPAC. “There’s a chance that you may be locked up for 180 days, but we’ve also seen instances where employees can start trading on day one — and instances where employees can only sell a limited amount of shares once their companies are able to report earnings,” Kevers said.

In some rare cases, the startup might give employees an opportunity to sell their stock back to the company in a secondary transaction ahead of the stock’s trading, Nimay Mehta, a partner at Lead Edge Capital, said. It can be beneficial for startups because it gives them a sense of the what outside investors are willing to pay for the stock.

Do the due diligence
So while employees can probably sell their shares the same way they would if their company went public through a traditional IPO, there are a few questions they should ask their employer before the deal closes, Kevers said.

“The process of going public via SPAC merger happens much faster than going public via traditional IPO,” he said. “As a result, employees don’t have as much time to think about what they want to do with their shares prior to a merger.”

Here are three key questions they should ask, according to Kevers:

• When is the last day they have to purchase their shares at the option price before going public?
• When does the lock-up period expire, and is there an early release for certain shareholders?
• How does the vesting schedule change as a result of the merger?

Kevers also has a reminder for employees who plan to cash in: Talk to a tax advisor to understand tax obligations.

It’s worth the time and money.