Merger & Acquisition Value Question - Option Exercise

My brain is stuck in a circular math formula. Can somebody help me think through this?

I will use a simplified example:
* Corp A is owned 50/50 by Alvin & Simon. They each have 400 shares.
* Theodore, a key employee, has vested in 200 stock options with an exercise price of $500.
* The shareholders have agreed to a merger at a price of $1 million.
* Theodore is going to exercise his shares and participate in the sale.

How much does each shareholder take home after the sale?

Do the shareholders split the $1 million or do they split $1.1 million?

So, once Theodore buys in, it'll be 40/40/20. Then the Chipmunks sell their shares to the Chipettes for $1m as agreed. The Chipmunks split the $1m. The $100k Theodore paid in belongs to the company, not them.
Right?

If that's the case., then Alvin & Simon each end up with $400K. So they say, "Let's figure out a way to get Theodore's shares out of the picture so we can each get $500K.

$1 million ÷ 800 shares = $1,250/sh

With Theodore's approval, let's give Theodore compensation of $150,000 (200 x ($1,250 - $500)) and cancel those options.

Now that he is out of the picture we can split the $1 million evenly."

Wouldn't the acquiring company come back and say, "Wait a minute! Our offer for $1 million was based on the value of the company using various metrics which included the cash that was in the bank at that time. You just reduced the bank balance by $150,000. We are going to decrease the price by $150,000."

If they are willing to receive $100k from him then pay him $150k to get him out of the deal, maybe there's a way for that to happen outside of the company.

First, their shares aren't worth $1250 unless he is out of the picture. Putting them at $1250 is overvaluing them. I would think a payout to Theodore of $100k (200 x ($1,000 - $500)) would be fair.

If he bought in, his 200 shares would cost him $100k and be worth $200k of the sale. Maybe Alvin and Simon could buy him out personally, gaining their 50% back, and then split the million. They get net $450 each, Theodore gets his gain, everyone wins.

Maybe Alvin and Simon could buy him out personally, gaining their 50% back, and then split the million.

OK. That's what they will do. They are going to take a $150K dividend from the corporation and buy Theodore out personally. Will the acquiring company be OK with that and not adjust the $1 million?