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Two Paths to the Same Destination
When someone acquires your company, the transaction is almost always structured in one of two ways: a merger or a stock purchase. The choice between them affects who has to consent, whether minority stockholders can block the deal, how the proceeds are taxed, and what happens to the company after closing.
Most founders don't think about this until a term sheet arrives. By then, the structure may already be dictated by the buyer. Understanding both paths ahead of time gives you leverage and clarity when it matters most.
The Merger
In a merger, your company merges into the buyer (or into a subsidiary the buyer creates for this purpose). The target company ceases to exist as a standalone entity. Every stockholder receives the merger consideration, whether they voted for it or not.
How it works:
- The board of directors approves the merger agreement
- Stockholders vote on the merger
- If the required approval thresholds are met, the merger closes
- All stockholders receive the consideration (cash, stock, or a combination)
Approval requirements:
- A majority of outstanding shares is the baseline under Delaware law
- Separate class votes may be required if the charter creates classes with distinct voting rights
- Preferred stockholders typically have protective provisions giving them a separate veto
Key advantage:
No holdout problem. Once the vote passes, every stockholder is bound. A minority stockholder who objects can't block the deal. They can seek appraisal rights (a court-determined fair value for their shares), but they can't prevent closing.
This is why mergers are the standard path for VC-backed companies with many stockholders.
The Stock Purchase
In a stock purchase, the buyer negotiates directly with each stockholder to buy their shares. The company survives as a wholly owned subsidiary of the buyer. Its contracts, licenses, permits, and identity remain intact.
How it works:
- The buyer presents a stock purchase agreement
- Each stockholder individually decides whether to sign and sell
- Once all stockholders agree, the transaction closes
- The company continues to exist under new ownership
Approval requirements:
Unanimous consent. Every single stockholder must agree. No one can be forced to sell (unless drag-along provisions apply).
Key advantage:
The entity survives. This matters when the company holds contracts, licenses, or permits that would be difficult to transfer or would require third-party consent in a merger. It's also simpler when there are only a few stockholders who can all agree quickly.
Key risk:
Any stockholder can hold out. In a company with even a small number of disgruntled or unreachable stockholders, a stock purchase can stall or fail entirely.
The Asset Purchase Alternative
There's a third structure worth knowing: the asset purchase. Here, the buyer purchases specific assets (IP, customer contracts, equipment) rather than the entire entity. The selling company continues to exist and retains anything not explicitly transferred.
Asset purchases are common for acqui-hires, distressed sales, product line acquisitions, and situations where the buyer wants to avoid inheriting unknown liabilities. They're less common for full company acquisitions because the transfer mechanics are more complex.
Practical Considerations
Drag-along rights. Many stockholder agreements include drag-along provisions that force minority holders to participate in a sale approved by a specified majority. If you have drag-along rights, a stock purchase becomes more feasible even with reluctant stockholders. Review your existing agreements now, not when the offer arrives.
Preferred stockholder consent. In nearly every venture-backed company, the preferred stockholders have a contractual veto over mergers and acquisitions through protective provisions in the charter or investor rights agreement. Even if common stockholders approve, preferred must separately consent. This is non-negotiable.
Tax implications. Both mergers and stock purchases are generally treated as stock sales for tax purposes, meaning proceeds are taxed as capital gains. Asset purchases can result in a blend of ordinary income and capital gains, depending on how the purchase price is allocated across asset categories.
Escrow and indemnification. Buyers almost always require a portion of the proceeds to be held in escrow for post-closing indemnification claims. Market standard is 10-15% of the deal value held for 12-18 months. Budget for this when calculating your net proceeds.
Stockholder representative. In a merger, a stockholder representative is appointed to handle post-closing matters (escrow releases, indemnification claims, adjustments) on behalf of all former stockholders. This is typically a founder or a professional service.
How to Prepare
The best time to prepare for a sale is years before it happens:
- Keep your corporate records clean. Missing board minutes, unsigned consents, and sloppy cap tables create friction and cost money during diligence.
- Know your stockholder agreements. Understand your drag-along rights, protective provisions, and any transfer restrictions.
- Maintain current 409A valuations. Buyers will review your option pricing.
- Build relationships with M&A counsel early. The compressed timelines of a deal are not the moment to start educating your lawyer on your business.
We work with founders at every stage to make sure the corporate foundation is solid long before an exit is on the table. When the offer comes, you want to be ready.
