In a stock purchase, the buyer acquires the target's shares and assumes all of the target's liabilities — known and unknown. Sellers prefer stock sales because proceeds are typically taxed as capital gains. Buyers generally prefer asset purchases because they do not assume unknown liabilities, but stock sales are often required when the target holds contracts or licenses that cannot be assigned without consent.
In a stock purchase, the buyer acquires the equity interests of the target company from its stockholders. The target company continues to exist as a legal entity and becomes a subsidiary of the buyer. All of the target's assets and liabilities transfer automatically because the buyer owns the entity that holds them. No third-party consents are required for asset transfers unless specific contracts contain change of control provisions. The tax treatment for sellers is generally favorable because stockholders recognize capital gain on the sale of their shares, potentially qualifying for Section 1202 QSBS exclusion if the stock is qualified small business stock held for more than five years. Gurpreet Bal notes that stock purchases are the preferred structure for sellers of venture-backed technology companies because they simplify the transaction and preserve favorable tax treatment, but buyers bear the risk of assuming all known and unknown liabilities of the target.
In an asset purchase, the buyer selects which assets to acquire and which liabilities to assume, leaving unwanted liabilities with the seller. This provides buyer protection against unknown legacy obligations. Sellers typically receive less favorable tax treatment in asset sales because gains on different asset classes are taxed at different rates, and some amounts must be recaptured as ordinary income. Asset purchases also require consent for assignment of key contracts.
In an asset purchase, the buyer selectively acquires specified assets and assumes specified liabilities of the target. The target company retains any assets not transferred and remains responsible for any liabilities not assumed. This structure allows the buyer to cherry-pick desirable assets, primarily intellectual property, technology, customer contracts, and equipment, while leaving behind unwanted liabilities. The target company continues to exist after closing and must be wound down by its stockholders. In Gurpreet Bal's practice, asset purchases are the standard structure for acquihires and for acquisitions of distressed companies where the buyer wants to avoid assuming legacy liabilities. The primary disadvantage for sellers is that proceeds from the asset sale are received at the entity level and must be distributed to stockholders, potentially creating a double layer of tax in a C corporation.
A direct merger combines the target and acquirer into one entity. A forward triangular merger uses an acquirer subsidiary as the merging entity, allowing the parent to avoid direct liability for the target's obligations. A reverse triangular merger preserves the target as a surviving subsidiary, which is valuable when the target holds licenses or contracts that cannot be transferred. The choice of merger structure affects liability isolation, tax treatment, and consent requirements.
A merger involves the combination of two legal entities, with one surviving and the other ceasing to exist. The most common merger structure in venture-backed acquisitions is a reverse triangular merger, where the buyer forms a merger subsidiary that merges into the target, with the target surviving as a wholly-owned subsidiary of the buyer. This structure achieves the same result as a stock purchase but uses the statutory merger mechanism to eliminate the need for individual stockholder signatures, instead relying on a stockholder vote to approve the merger. Reverse triangular mergers also allow the target's contracts to remain in place without triggering assignment provisions that would require third-party consents. Gurpreet S. Bal advises that reverse triangular mergers are the most common structure for acquisitions of venture-backed technology companies with large numbers of stockholders, SAFE holders, and optionholders.
In a stock purchase or merger, SAFEs and convertible notes typically convert into shares before closing and are then cashed out as equity in the transaction. In an asset purchase, SAFEs and notes are generally treated as debt of the selling entity — paid off or settled as part of the asset sale — rather than as equity interests in the acquired assets. This difference means SAFE holders may receive materially different treatment depending on the deal structure chosen.
The treatment of outstanding SAFEs and convertible notes differs significantly across deal structures. In a stock purchase, SAFEs and notes remain outstanding obligations of the target company unless separately negotiated. In a merger, the merger agreement typically specifies the treatment of each outstanding instrument, which may include conversion into merger consideration, cancellation for a specified payment, or assumption by the buyer. In an asset purchase, SAFEs and notes remain obligations of the selling entity and must be addressed in the wind-down process. Gurpreet Bal advises buyers and sellers to analyze the specific terms of each outstanding SAFE and convertible note early in the transaction process because the instruments may contain provisions that affect the deal economics, including conversion triggers tied to change of control events, liquidation preferences that prime common stockholder distributions, and MFN provisions that adjust conversion terms.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on mergers and acquisitions, venture financings, IPOs, and cross-border transactions. He has advised on more than 50 M&A transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology.