If the worst does happen, incentive schemes generally provide for all awards to vest or become exercisable on a liquidation of the scheme company. However, as it is very unlikely that any new shares may be issued on a liquidation, if an employee’s award is to subscribe for new shares, they will only have a cash claim.
Further, even if an award can be satisfied with existing shares, it may still be worthless as shareholders are last in the line to receive anything when a company goes into liquidation. Even if there are reserves left for shareholders once all creditors have been paid, options will only be worth exercising if their exercise price is lower than the value of the shares which may be acquired.
However, awardholders do at least walk away “scot-free” on a liquidation. For any employees holding nil-paid shares, the impact of liquidation is much worse: liquidators can call on them to pay up their shares in full.