For company owners and key employees, stock acceleration could be a crucial component of the equity jigsaw. Understanding vesting acceleration and its triggers can prevent you from suffering a large loss of equity if your business is liquidated or acquired. Additionally, you can’t rely on merger and acquisition (M&A) discussions to iron out acceleration clauses. These clauses are often included in the initial vesting conditions of your equity award, which may outline the circumstances under which either single-trigger acceleration or double-trigger acceleration will apply to the vesting of your shares. In this article, we will discuss the difference between single and double trigger acceleration and how you can negotiate acceleration provisions in the event of single trigger vesting or double trigger vesting.
Single trigger and double trigger acceleration
When signing an employment agreement, it is a wise thought to incorporate vesting acceleration clauses or conditions into your equity award. The fundamental concept of this guide, single-trigger acceleration vs. double-trigger acceleration, must first be understood before we can proceed to how employees can seek such provisions. We will first go through the fundamentals of vesting and the common vesting schedules for owners and key employees. This conversation will inevitably lead to a description of stock acceleration, which refers to a situation during which a stock that was previously subjected to a vesting schedule becomes completely or partly vested in the occurrence of a triggering event.
What is Vesting?
When important employees get equity compensation and stock options, the stock is restricted to a vesting period or schedule. This is done to ensure that workers only acquire full ownership of their shares once they’ve been with the firm for a particular time or completed certain milestones. Vesting rights may depend on time-based, performance-based, or both types of vesting criteria. They are meant to act as an approximate gauge of how much the employee has contributed to the expansion of the company.
The employee begins to truly own some of their shares only after one year, according to a normal vesting schedule, which unlocks complete equity ownership after just a term of four years including a one-year vesting cliff.’
Understand vesting acceleration
Accelerated vesting permits an employee to expedite the process of getting access to restricted company shares or incentive stock options. When stock awarded to an individual employee is no longer bound to the initial or standard vesting schedule, it is called vesting acceleration. As a result, the employee can quickly acquire either a portion or complete ownership of their company stocks. Usually, only founders and important personnel benefit from vesting acceleration, and these individuals frequently have acceleration clauses or restrictions included in terms of their share grants.
Why should you implement vesting acceleration?
In most situations, the original vesting provisions should include clear legal language that describes what occurs in the event of single -Trigger Acceleration or double-Trigger Acceleration. If stated legal wording isn’t already in your vesting agreements, you should add it now as it can’t truly be introduced at the time of acquisition and will provide you leverage in negotiations. In addition to providing highly valued workers with a superior offering, a business, particularly a startup, might utilize vesting acceleration to increase its appeal to potential buyers significantly.
Since any existing equity would affect the value of the shares at the acquisition price, trigger accelerations are often a contentious matter, particularly in businesses bought by VCs. The acquirer will often add management retaining incentives as part of the transaction, which has a cost if vesting terms are expedited upon acquisition. Generally, when specific requirements are satisfied, vesting acceleration rules allow vesting to be expedited. There are two primary types of vesting acceleration: single-trigger and double-trigger. The number of triggers indicates the number of events that must occur for acceleration to take effect.
What is a vesting trigger?
Any event that could result in vesting acceleration is known as a vesting trigger. The two most frequent triggers for vesting are involuntary termination of employment and a change in control, which includes the sale or purchase of a corporation by a third party. When a company does too well in the market, it can be offered a proposal of acquisition. This jeopardizes employee equity rights without a proper structure for vesting triggers in the contract. Therefore, vesting triggers are often used to shield employed individuals, particularly company founders and top management employees. In many circumstances, the equity award contains wording referring to these triggers.
Single-trigger acceleration refers to the partial or complete acceleration of options or stock vesting based on the occurrence of a single event, which is the “trigger” for acceleration.
Acceleration based on the occurrence of two separate events is known as double-trigger acceleration. In this situation, each event is a “trigger,” and the presence of both occurrences is a “double trigger”.
What is single trigger acceleration?
When vesting trigger events take place, the founder or an executive employee is entitled to a vesting acceleration. Single-Trigger Acceleration refers to entitlement to vesting rights after just one triggering event. Single-Trigger Acceleration is often caused by the acquisition or sale of a business. As a consequence, all or part of the vesting limitations associated with the transaction will expire. This strategy was created to compensate workers for their contributions to the company’s sales.
However, Single-Trigger Acceleration can also be induced by involuntary termination. In such cases, it becomes a part of the severance remuneration. For the same reason, Single-Trigger Acceleration does not favor the employer and is not very common. With this vesting arrangement in the plan, the key employees can quit the business when the acquisition deal is completed. This would make it extremely difficult for the purchaser to hire the same type of individuals or maintain these key employees. The acquiring firm would pay more than it intended when acquiring the business.
What is double trigger acceleration?
As the name implies, double-trigger acceleration occurs when two occurrences coincide to cause the vesting acceleration. Double-trigger acceleration shifts the balance in favor of conditions that VCs and perhaps other investors like while also still offering critical employee safeguards. It accomplishes this by adding a second trigger.
The two triggering events that induce double-trigger acceleration are the company’s sale or takeover and the employee’s involuntary termination, generally within a particular period of the sale’s conclusion. The longer this length of time, the better the terms for the employee.
Single trigger acceleration vs double trigger acceleration
VCs and investors may be hesitant to invest in firms when the founders or executives have single-trigger acceleration agreements. It is no surprise since such an acquisition has the potential to adversely affect stock dilution and contribute to retention challenges with the firm’s best talent. Alternatively, double-trigger acceleration can be an ideal solution since it aims to safeguard the employee’s shareholdings while simultaneously sheltering the acquirer from some of the worst economic burdens involved in single-trigger acceleration.
With double-trigger acceleration, the acquirer gets to the advantage of the employee’s ongoing commitment and doesn’t have to pay out a lot of equity when the sale closes. There is also some leeway since the new employer might need to decide to fire the employee if it makes economic sense, taking into account how the employee’s vesting acceleration affects the option allocation of other equity investors.
But double-trigger acceleration also lets the employee keep on growing their share of the company’s equity by the original vesting schedule. It assures them that firing the employee may not benefit the acquirer and that even though they are fired, the said “triggering event” would then cause their equity to vest.
How can employees negotiate with acceleration provision?
Before you sign an employment contract, if you can, it’s a smart option to make a deal about vesting acceleration provisions or an acceleration stipulation into your equity grant. When you truly need a stock vesting acceleration provision, it could be challenging to secure one. As a general rule, founders and key staff should make sure that whatever triggering events that might hasten vesting are included in their share award.
Keep in mind that vesting acceleration is often only offered to the company’s founders, executives, and other important workers; if you don’t belong to this group, you may not be eligible. However, if you belong to this group, negotiating acceleration provision is a step that looks ahead to ensure you don’t lose the value of your unvested capital if and/or when triggering events occur.
Example of stock acceleration
Sara is a startup’s CMO. Her salary includes equity that will vest after four years. Everything’s terrific, and business is increasing. However, Sara’s firm accepts an offer to be bought after only two years into her employment. The purchasing business already has a CMO and doesn’t require her services, so they could fire her after the acquisition. Sara may or may not wish to work for the new firm, but it is necessary to note that the firm is involuntarily terminating her employment; she isn’t leaving with a choice.
Due to a double-trigger acceleration agreement, Sara’s unvested shares are safeguarded since it’s unreasonable to compel her to give up the value of her unvested equity since the acquiring business already has a CMO. Her original grant specified that two triggering events will hasten her vesting. Here the two triggers are-
- Sale/merger/acquisition of the company; i.e., change in ownership control
- Involuntary termination of Sara’s employment
Both triggers accelerate Sara’s stock vesting, and she receives the entire value upon termination. Sara’s vesting required two triggers, hence, it is Double-trigger acceleration. Single-trigger acceleration occurs when just one event triggers vesting.
Create and manage your stock vesting schedule on Eqvista!
Businesses, investors, and shareholders can monitor, manage, and decide wisely regarding their companies’ equity with Eqvista. Stock vesting becomes less complicated, faster, and simpler. Vesting plans can be easily made with Eqvista. Both milestone vesting and time-based vesting are supported by our cap table software. To learn how to design vesting plans on Eqvista, contact us today!