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I am confused. Why is the company allowed to do this and not any employee. I mean, isn't this insider trading on the company's part? They could in theory take options, then after the value of the firm increases, they could sell them and pay the money to their execs - isn't this strategy just an elaborate insider trading scheme?

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The companies being asked to include options/warranty/equity usually aren't public, so this wouldn't be insider trading on that basis. Overall, it's better to think of it as Big Co is making an investment in Little Co that it thinks will appreciate as a result of Big Co's business. The cost of that investment is included in the price of whatever Little Co is selling, ergo, there's a large implied discount because Big Co's business is so valuable.

Insider trading is illegal because it is theft from the company, not because it is unfair. Hedge funds spend a fortune gaining an advantage that is material and non-public. The key is that they didn't steal it from the company.

So if the buying company forced an employee to give them options without the selling companies consent, that would be insider trading. But if the deal is company to company, then there shouldn't be an issue.

To quote Matt Levine: This is definitely not legal advice.

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