Underwater options in a cash deal: the one-minute payout test

Your startup is being bought for cash, and your underwater options can be canceled for zero at closing. The payout test is one comparison: your strike price against the per-share merger price.

An option is underwater when its exercise price is above the stock price. RSUs are shares promised to you, usually after vesting. Restricted stock is already issued but may be subject to vesting. Warrants are rights to buy shares later, so the same strike-versus-price comparison applies when the deal cashes them out. In a cash deal, the payout question is: what is the per-share price, and where does your strike sit?

The trap: underwater options can be canceled at closing

AbbVie completed its acquisition of Apogee Therapeutics, Inc. on September 3, 2026. The cash deal gave Apogee shareholders $135.11 per share and produced a total equity value of about $10.9 billion. When the merger became effective on September 3, 2026, Apogee's outstanding voting and non-voting common shares, except for specified exclusions, became entitled to $135.11 cash per share after tax withholding. For the September 3, 2026 deal, Apogee's in-the-money options, RSUs, restricted shares and warrants received cash tied to the $135.11 merger price, whereas out-of-the-money options were terminated with no payment.

The merger agreement can add a CVR, a side promise to pay more later if a milestone happens. Vigil Neuroscience's May 21, 2025 Form 8-K reported that Sanofi would acquire the company for $8.00 per share in cash at closing.

Under the Sanofi-Vigil merger, an option whose exercise price was below the $8.00 closing amount would be closed out for the option share count times the $8.00-over-strike spread, plus one CVR per option share. Under the same agreement, an option with an exercise price of $10.00 or more would be canceled with no payment.

Underwater options with strikes from $8.00 up to, but not including, $10.00 received one CVR per option share, with a possible later cash payment of $10.00 minus the strike if the CVR milestone was met. Unvested Vigil RSUs would accelerate and be exchanged for the RSU share count times the $8.00 closing amount, plus one CVR per RSU share, subject to tax.

The rule: strike below price, or zero

Put the numbers on a whiteboard. Write the merger price on the left. Write your strike on the right. If the strike is below the price, the spread is your gross cash before withholding. If the strike is at or above the price, the option has no cash value in a plain cash merger.

RSUs and restricted stock are different. They can pay the full per-share price when vested or accelerated. Multiply the per-share price by the shares that vest or accelerate to get the gross amount before withholding. Do this before you sign any waiver or consent.

A non-qualified option, one type of employee option, with a $10 exercise price and a $12 stock price creates $2 of ordinary income per share at exercise. Ordinary income is taxed like wages. In a merger, the same spread idea applies to the cash price.

The one-minute test: strike below price pays the spread

• Find the per-share cash price. You are done when you have a single number in the merger agreement.
• Find your strike price. Look for the exercise price on your grant or cap table, not the current stock price. If you have multiple grants, do the test for each grant.
• Subtract strike from price. The result is a positive spread, zero, or a negative number. Don't assume underwater options become RSUs or get a cash top-up.
• Multiply the spread by shares. That gives gross cash before withholding. When the spread is negative, stop; the option likely pays nothing unless the deal adds a CVR.
• Check cancellation and cashless-exercise language. You need to know whether your options are canceled, cashed out, or converted into a CVR. Cashless-exercise means the deal nets the strike for you instead of making you pay it out of pocket. Use that language to decide whether to exercise, cancel, or take the cashless-exercise path before close.