What Happens to Stock Options if a Company Goes Bankrupt?
Shares in a company represent ownership in a company. Hence, when a company goes bankrupt, the shareholders, as owners, are last in line for assets and the company's stock options become worthless.
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Stock
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Stock is a company's initial capital. A company "goes public" (meaning ownership moves from private individuals to whomever buys a share) when it splits this capital into units called shares and auctions them off. Shareholders have the advantage of owning a part of the profits of the company, but also risk losing the money that they've invested if stock prices fall or the company goes bankrupt.
Risk
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Entrepreneurs, businessmen and investors essentially bet money that their activities, products and strategies will generate a profit. Bets are inherently risky; if they bet correctly, the payoff is much more money than interest on a bank account would ever generate, but when they are wrong, they lose money. When a company goes bankrupt, the businessmen, entrepreneurs and investors lose the money (usually in stock options) and time that they put into the company.
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Share Price
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The price of a share in a given company is, very simply put, what the company is worth, plus what investors believe the future profit will be. If a company goes bankrupt, the future profit projection is zero, so the share price falls to zero and the shares become worthless pieces of paper.
Bankruptcy
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According to The Motley Fool, bankruptcy "is the legal process of eliminating or limiting one's debts by demonstrating inability to pay." When a company files for bankruptcy protection, the company begins a complicated legal process to sell everything of value (liquidate assets) and pay off as many outstanding debts as possible. Once the assets have been sold, creditors can no longer request money from the company.
Creditors
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In liquidating assets and paying off debts, the company has a hierarchy of obligations. Some creditors will be paid first, often receiving all of the money owed, while the next in line will get most of their money back, the next group will get a little, and others will get nothing. Owners -- executives and shareholders -- and other investors are at the very back of the line.
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