VC & PE Glossary
What Is Merger?
Updated
Definition
A merger combines two companies into one legal entity or parent structure—common exit path when a strategic or financial buyer acquires a startup via stock-for-stock or cash merger.
Useful for: Founders, Investors
Merger is a legal transaction in which two companies combine, with one entity surviving or a new parent holding both, and shareholders receiving agreed consideration.
How it works
In startup exits, acquirers often use a merger sub structure: buyer creates a subsidiary that merges with the target; target shareholders receive cash or acquirer stock; target becomes part of buyer’s org.
Key steps:
- Board and stockholder approvals (preferred and common voting per charter)
- Merger agreement with price, escrow, reps, and MAC clauses
- Regulatory filings (HSR antitrust where applicable)
- Closing and integration
Consideration may be all-cash, all-stock, or mixed. Liquidation preferences determine how proceeds flow among preferred and common.
Alternatives include asset purchases (buyer selects assets/liabilities) and stock purchases (buyer buys shares directly).
Why it matters
- Founders: Employment agreements, option acceleration, and rollover equity are negotiated in the merger docs—not side letters after signing.
- Investors: Merger structure affects tax, liability assumption, and speed. Asset deals may leave liabilities behind; mergers typically transfer everything.
Common mistake
Announcing “we’ve been acquired” at signing. Until closing conditions clear and funds wire, the merger can still fail.
Related ideas
See also change of control, material adverse change (MAC), escrow, and liquidity event.
Related terms
- Change of Control — Change of control is a transaction or event that shifts majority voting power or ownership of a company — such as a merger, acquisition, or sale of most assets — often triggering contractual rights for investors and employees.
- Material Adverse Change (MAC) — Material adverse change (MAC) is a contract clause allowing a buyer to walk away from a deal if the target suffers a significant negative change in business, assets, or prospects before closing.
Common questions
Short answers for founders, LPs, and operators