When Equity Becomes Currency: Unlocking the Value for Employees in Share Swap Deals

Recently, a famous edtech company has been reported, according to media coverage, to acquire a rival edtech platform in an all-stock- deal. If completed, the acquired company’s cofounder / CEO is expected to remain with the merged entity and continue building the platform. Rather than a celebratory buyout, it is more like a necessary consolidation in India’s edtech sector.

Its all-stock structure is central to how it will affect founders, employees, and investors. In this article, we use this transaction as a reference point to reflect on how share swap deals work, explore their strategic pros and cons, and highlight what senior leaders and employees should watch out for.

What Exactly Is a Share Swap?

Share swaps (also called stock-for-stock or share-for-share deals) are M&A structures where the acquirer uses his own shares instead of cash to pay target shareholders, based on a negotiated exchange ratio.

Share swaps are widely used in mergers, acquisitions and corporate restructurings, especially where the strategic aim is to combine businesses, reduce competition, or achieve synergies while preserving the acquirer’s cash and borrowing capacity. For founders and CEOs of the acquiring company, share swaps generally mean equity dilution but potentially greater absolute wealth if the combined entity creates higher and sustained value.

In a pure share swap scenario, the acquired company’s shareholders would receive shares of the acquiring company in exchange for surrendering their equity in the acquired company. The share swap ratio (how many acquiring company’s shares each acquired company’s share converts into) would typically be determined by independent registered valuers, as required under Indian regulations.

How Do Companies Usually Structure These Deals?

Not every acquisition is purely cash or purely stock. In practice, acquirers often blend the two to manage risk and incentivize different stakeholders.

Here are three illustrative structures:

1. Pure Share Swap:The acquirer issues new shares to the target shareholders. No cash changes hands. This works best when both parties believe in the combined entity's upside, and neither has the liquidity for a cash deal.

For example, a leading food delivery company’s acquisition of a quick- commerce platform in 2022 was structured as a $568 million all-stock transaction with a share swap ratio of 10:1, where shareholders of the -quick commerce -platform received 1 share of the acquirer in exchange for every 10 shares they held in the target. Since the announcement, the acquirer’s stock is up by roughly 200%, enabling tremendous upside to the wealth creation opportunity.

2. Cash and Share Swap: A portion of the consideration is paid upfront in cash (providing immediate liquidity to sellers) while the rest is in the form of share swap based on exchange ratio (keeping sellers invested in future upside).

For example, the same food-delivery company as the previous example also acquired a Bengaluru based- online food platform in September 2018 in a combination of cash-and-stock deal of $18 million enabling founders to get partial liquidity without fully walking away.

3. All‑Stock Acquisition with Earn‑outs:

The acquirer does not pay cash or swap shares with the selling entity; instead, it issues its own shares. The seller exits the operating business but remains invested via equity in the acquirer. This is structurally similar to a share swap but here the “target” is typically a business unit or asset rather than a standalone corporate entity with many minority shareholders. This structure is common in acqui-hires, where the acquired company's team is the primary asset.

For example, the same food‑delivery company’s acquisition of a global player’s India food‑delivery business saw the seller receive a 9.99% equity stake in the acquirer in return.

What Happens to Employees with Vested ESOPs?

When an acquisition is announced, employees holding vested Employee Stock Options (ESOPs) have two options:

1. Do they convert the options to shares and roll into the acquirer's equity?
2. Do they take cash equivalent to the current value of the underlying shares?

In a Share Swap: Acquired companies may ask the employees with vested units to exercise their rights and take shares before any stock-based deal is completed. By converting vested options into shares the company gives the employees parity with other shareholders in any stock-based merger and preserves a claim on any remaining value. In practice, this means employees who exercise their options may receive acquiring company shares (once the deal closes) at the conversion ratio determined for all shareholders.

In a Cash Settlement: Acquired company sets aside a cash pool to buy back vested employee stock or options, giving current and former employees direct liquidity instead of additional equity or waiting for an exit.

Benefits and Watchouts