What is a merger?
Takeaway: A merger is the most common and often most flexible M&A structure, allowing two companies to legally combine into one and is typically treated like a tax-efficient stock sale for the sellers.
The third, and often most common, way to structure the sale of your startup is a merger. A merger is a formal, statutory process where two separate corporations are legally combined into a single surviving entity. While there are several ways to structure a merger, in the world of startup acquisitions, the most common form is a reverse triangular merger.
While the name is a mouthful, the structure is designed to be elegant and efficient, combining the legal and liability protections of an asset sale for the buyer with the significant tax advantages of a stock sale for the sellers.
How a Reverse Triangular Merger Works
It is a three-step dance:
The Buyer Forms a Subsidiary: The acquiring company first creates a brand new, wholly-owned subsidiary corporation. This "Merger Sub" is just an empty shell company.
The Merger: Your startup (the "target" company) then formally merges into the Merger Sub.
The Conversion: In the merger, all of your company's stock is automatically cancelled and converted into the right to receive the merger consideration (the cash and/or stock being paid by the acquirer). The Merger Sub (which now contains all of your company's assets and liabilities) survives the merger and becomes a wholly-owned subsidiary of the acquiring company.
The Best of Both Worlds
This structure is popular because it provides key benefits for both sides of the deal:
For the Buyer (Liability Protection): Because the merger happened with their subsidiary, not the parent company, all of your startup's known and unknown liabilities are contained within that subsidiary. This provides a liability shield for the main acquiring corporation, similar to the benefit they would get in an asset sale.
For the Sellers (Tax Efficiency): For U.S. federal tax purposes, a reverse triangular merger is almost always treated as a stock sale. This is the critical benefit for you and your stockholders. It means the transaction is subject to a single layer of tax at favorable long-term capital gains rates, and it preserves the ability for eligible stockholders to use the powerful QSBS tax exclusion.
A Flexible and Common Structure
Because it provides the best combination of liability protection for the buyer and tax efficiency for the seller, the reverse triangular merger has become the most common and standard structure for friendly, negotiated acquisitions of venture-backed startups. It is more legally complex to document than a simple stock sale, but it is the preferred structure for most sophisticated M&A transactions.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.