Selling options on acquisition

Question

I've been trying to understand this hypothetical scenario wherein a company in which you own options is acquired. In it, the author posits you own .67% and 20,000 shares ($2 strike price, $4 share price) of a company that gets acquired for $50,000,000 and pays out about $5,000,000 to investors due to preferred stock terms, leaving $45,000,000.

I followed this scenario to this point, but then he says

you own 20,000 shares with a current share price of $4 per share, but you still have to buy these options to convert them to common stock. Your strike price is $2 per share, so you’ll have to cough up $151,196 to purchase the shares, which you will resell for $4 per share, getting you $151,196 in cash.

Here he loses me. I follow the percentages ($2 is 50% of $4 and 50% of .67% of $45M is about 150k) but I don't follow the share numbers.

Why would I not pay $2 per share, which was my strike price (total: $40k)
Are the shares not worth more than $4 since the acquisition? 
By this math, if the investor hadn't increased the share price to $4 (i.e. if there was no new investor but the company was still acquired for $50M) what would have happened? It feels like my shares would be worth less, and that doesn't make a lot of sense to me.

Dheer · Answer

Why would I not pay $2 per share, which was my strike price (total: $40k)

This depends on how the options were worded. In the example it is assumed that the options will be repriced based on the new valuation ... so the $2 options now cost for $7.56 based on the valuation, hence you need to pay more for the options and not just $2.

This can be worded differently for different companies. i.e. in some companies, it can be at fixed $2 irrespective of any price. This was the practice in 2000's but has changed as more unicorns are floating around. Hence it is very important to read the options and how the pay out will be.

Are the shares not worth more than $4 since the acquisition?

Yes they are now worth around $15.12 and hence you will get around 302,293 for 20,000 shares.

Fattie · Answer

Options are called "options contracts" because they are literally a contract.
OP, regarding the specific scenario you outline ("something to do with an acquisition"),
every detail of that scenario would be covered in the contract, in each case, with each company.
Thus, the question is the same as asking "What happens if I have a house under contract and before I pay we discover the dishwasher is broken?" The answer is a completely uninteresting "read the contract". There's no "general" situation.
(The linked article is completely useless. The author presupposes there is some "general" situation.)

Selling options on acquisition

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