October 26, 2026
In a stock sale or merger, your employees keep their jobs with the same company, now owned by the buyer, unless the buyer decides otherwise. In an asset sale, everyone is terminated by your company and rehired by the buyer, so each person needs a new offer. Either way, the buyer will decide who it wants, how much it will pay to keep them, and whether the deal closes only if certain people sign. The founder's job is to negotiate the retention budget, protect the people who aren't coming over, and manage the legal steps for both groups before closing.
Key takeaways
The structure of the deal decides whether anyone's employment legally changes. In a stock purchase or a merger, the company survives as a legal entity, the buyer becomes its owner, and every employment relationship continues without interruption. Offer letters, confidentiality agreements and benefit plans stay in place until the buyer changes them. In an asset purchase, the buyer acquires the business but not the entity, so your company terminates every employee at closing and the buyer hires the ones it wants. Each of those people gets a new offer letter, signs the buyer's confidentiality and invention assignment agreement, and starts fresh in the buyer's benefit plans. Accrued vacation is paid out at termination where state law requires it, and service with your company counts toward the buyer's plans only if the agreement says so. See Startup Acquisitions: The 3 Types of Deals and How a Sale Works.
Buyers usually prefer an asset deal when they want to choose their employees and leave liabilities behind, and a stock deal or merger when they want the whole company and a clean transfer of contracts. Immigration can tip the structure: an employee on an H-1B visa can usually continue working after a stock deal or merger because the employer's identity is unchanged, while an asset purchase may require the buyer to file a new H-1B petition unless it qualifies as a successor in interest, meaning it assumes the seller's immigration obligations and keeps the terms of employment the same. Flag every visa holder to the buyer early.
The buyer will identify the people it considers essential, usually the founders and a handful of engineers, and will make their acceptance of new offer letters a condition to closing. If they don't sign, the buyer can walk. That gives those employees real leverage, and it gives a buyer a reason to lower the price or renegotiate if one of them wavers.
Negotiate the condition rather than accepting it as written. Keep the list short. Set the threshold below 100%, for example that at least 80% of the named people, including a few individuals who truly can't be replaced, accept offers. Require the buyer to deliver its offers within a fixed time after signing so the uncertainty doesn't drag on. And make sure the offers the buyer must make are described in the agreement: base pay at least equal to current pay, a defined retention package, and no new restrictive covenants beyond those the person already has.
Founders face a particular conflict here. You are negotiating your own employment with the buyer while you owe duties to the stockholders, and investors will want to know that your offer didn't come at the expense of the price. Disclose your package to the board and keep it at market. See Being Acquihired.
A retention package is what the buyer pays employees to stay after closing. It comes in three forms: cash bonuses paid at milestones such as 12 and 24 months, new grants of the buyer's equity on a new vesting schedule, and, for founders, a portion of the purchase price that is subject to continued employment. All three come out of the buyer's pocket rather than the sale proceeds, so they don't reduce what stockholders receive, which is why the LOI should state clearly whether retention is on top of the price or carved out of it. See How Do I Read an Acquisition LOI?.
Ask the buyer for the retention budget, the allocation among employees and the vesting terms before you sign the LOI, because your leverage drops once exclusivity starts. Retention payments are compensation, so they are taxed as wages when paid, and large packages for founders and officers can run into the golden parachute rules under Section 280G, which is a question for a tax advisor.
The buyer's new equity grants will have their own vesting, often starting over from closing. Your existing options are handled separately under the merger agreement: assumed, substituted, cashed out or cancelled. See What Happens to Stock Options When a Startup Is Acquired? and Single Trigger vs Double Trigger Acceleration.
Your employment or consulting agreement with the buyer decides your role after closing and how much of your payout depends on staying. Get your own lawyer for it. Company counsel represents the company in the sale, and on your package your interests and the company's can pull apart.
Start with the job: your title, who you report to, what you can decide without asking, and a bonus tied to results you control during integration. Then the exits. "Cause" should be narrow and objective, such as fraud, a felony or a material breach you fail to fix after notice. "Good reason" should let you resign and keep your protections if the buyer demotes you, cuts your pay or relocates you. Severance should be paid if you're terminated without cause or resign for good reason within a set period after closing, using the same definitions as your acceleration terms. See Single Trigger vs Double Trigger Acceleration and Startup Severance.
Know what happens to your unvested founder stock at closing, and whether the buyer wants you to re-vest part of your vested proceeds. Keep money for your stock and money for your work separate in your head and in the documents. Purchase price goes to every holder through the waterfall. A retention bonus or new grant is compensation paid only if you stay, and shifting value from the price into your package is the conflict your investors will watch for.
Then the covenants. Buyers often send their standard offer letter and restrictive covenant package days before signing. Ask for those forms at the LOI stage and treat them as a closing deliverable with a deadline. Westaway's position is that employees shouldn't sign non-competes, and that includes you as the buyer's employee. If the buyer needs a founder non-compete, it belongs in the purchase agreement as a covenant from a seller, limited to the business you sold and for a fixed term. Resist a second, broader non-compete in your employment agreement tied to everything the buyer does. Even a seller's non-compete has limits: in 2022 the Delaware Court of Chancery refused to enforce a sale-of-business non-compete that reached all of the buyer's businesses rather than the one it bought. Finally, if you and your co-founders might build something together again, ask for a carve-out in any non-solicit that lets you recruit and hire each other after you leave.
They are your company's responsibility, and usually your cost. The purchase agreement typically requires the seller to terminate employees the buyer doesn't hire at or before closing, and to pay their final wages, accrued vacation and any severance. Those costs are either a transaction expense deducted from the price or a liability the buyer assumes, so negotiate which.
Treat the non-hires as a layoff and follow the same steps: a severance offer in exchange for a release, final pay on the timeline your state requires, benefits continuation information and the return of company property. Two to four weeks of base salary is typical early-stage severance, and three to six months for executives. Group terminations of employees aged 40 or over need the longer consideration periods and the disclosures required by the Older Workers Benefit Protection Act for the release to be valid. See How Do I Run a Layoff at My Startup?.
If the cut is large, the federal WARN Act may apply: employers with 100 or more employees must give 60 days' notice before a plant closing or a mass layoff, and a mass layoff generally means at least 50 employees at a single site making up at least a third of the workforce there, or 500 or more employees at a site regardless of percentage. In an asset sale, the seller is responsible for WARN notice for terminations up to and including the closing date and the buyer for terminations after it, which is why buyers hire people effective at closing. Several states have their own versions with lower thresholds, and some with longer notice periods, including New York (50 employees, 90 days' notice) and California (75 employees), so check the state of every affected employee.
Expect the buyer's diligence to go through every employee file: offer letters, confidentiality and invention assignment agreements, contractor agreements, classification of contractors and exempt employees, I-9s, benefit plans and any claims. Problems found here become special indemnities or price reductions, so clean them up before you go to market. See Startup Due Diligence.
Benefit plans need decisions. Many buyers require the seller to terminate its 401(k) plan at least the day before closing, so the buyer doesn't inherit the plan and its own plan isn't treated as a successor plan, which would block distributions. Termination fully vests participants and starts a distribution process your payroll provider or plan administrator has to run on time. Health plans in an asset deal end at closing, with COBRA notices going out to everyone who isn't picked up by the buyer's plan.
Accrued vacation, bonuses earned through closing and commissions need to be calculated and either paid at closing or carried over in writing. If you use a PEO, the buyer will usually move employees off it at or soon after closing.
Check the buyer's form offer letters before your people see them. Buyers sometimes include non-competes and probation periods as a matter of course. Westaway's position is that employees shouldn't be asked to sign non-competes and offer letters shouldn't include probation periods, and a buyer will often drop both if asked. Non-competes given by founders as sellers of the business are a different matter, enforceable in most states including California, and are negotiated in the purchase agreement. See Non-Compete Clauses.
Until signing, the deal is confidential, and your NDA with the buyer will usually limit who at the company can know. Keep the circle to the people needed to run diligence. After signing, plan the announcement with the buyer: a company meeting, individual conversations with the key employees and with anyone not coming over, written equity letters explaining what happens to each person's options, and the buyer's offer letters delivered the same day. People will ask three questions: do I have a job, what happens to my equity, and what does the buyer want from me. Have the answers ready. Promises made in a hallway become claims later, so say nothing about retention, titles or equity that isn't already in a document.
For more, see How Does an Earnout Work?, What Do I Need to Do When an Employee Is Fired?, Startup Employment Contract Guide and Independent Contractor vs Employee.
If you're planning an acquisition and want the employee side handled properly, contact us.
