Now that you know all about being a founder, and how to distribute vesting shares, the next thing that you need to know about it is “double-trigger” acceleration. Some of you may have already heard about this from professionals in the field. So what are they talking about?
To understand all about the triggers, we need to learn about accelerated vesting. Accelerated vesting permits an employee to accelerate the vesting schedule through which this person would then get access to the stock options or restricted company stock.
The rate of this kind of vesting schedule is usually faster than the standard or initial vesting schedule. Hence, the person would get the financial benefit from the options or stocks much sooner. And in case a company decides to adopt the accelerated vesting method, then they would have to work out giving the stock options sooner than a typical vesting schedule.
Reasons to implement Accelerated Vesting
Aside from offering high valued employees with a better offering, a company (specifically a startup) can use accelerated vesting to make itself much more attractive to an acquiring company.
For instance, a young company is being bought by another company and the vesting schedule for the employees hasn’t matured yet. Let us say that the vesting schedule is for five years and it has just been two.
The option plans can have a provision upon takeover by another company for the stocks to become completely vested. It is an incentive for these employees to remain with the company until and through the acquisition. A similar reason would be to keep employees through an initial public offering (IPO).
With everything clear about accelerated vesting, let’s move onto the acceleration triggers for this. To begin with, there are many forms of acceleration provisions, but the two main kinds include the single-trigger and double-trigger accelerations. And the main triggering event for both is the change of control or the sale of the company.
Both have been explained in detail below:
Founders and key executives negotiate their own equity arrangements for the acceleration of vesting on their equity upon a triggering event.
In such a case, the main triggering event is the sale of the company. So if the acceleration is triggered by the sale of the company, it is called a “single-trigger” acceleration. The result of this is in all or some of the vesting restrictions lapsing in connection with the sale. This plan was designed to reward the employees for their contribution to the sale of the company.
On the other hand, the acceleration can also be triggered by involuntary termination of staff and can be included as a part of the executive’s severance package. However investors are not a fan of the single trigger acceleration option upon the sale of the company, as it usually turns off the potential acquirer.
This is because the acquirer would want to continue the services of the company in the same way as it was with the same key employees. And with this vesting scheme in place, the main employees can leave the company when the deal closes. This in turn would become a huge task for the acquirer to hire the same kind of people or retain these key employees. Whatever the case, it would cost the acquirer more than they anticipated when purchasing the company.
As the name says, double-trigger acceleration takes place when two events occur to trigger the acceleration. Usually, this includes the involuntary termination of employment within 9 to 28 months of closing and the sale of the company. The qualified termination includes the termination of employment by the company without a “cause”. But it can also include the resignation of the employee with a “good cause”.
As compared to the single-trigger acceleration technique, the double-trigger acceleration has become very popular in many early-stage companies. In fact, not only do investors support this plan, but it also does the work of protecting the employee from being terminated by the acquirer of the company. Without the acceleration feature, the employee would be in a bad place in such a case. This is the main reason why it is the most opted for option by both the company and the employees.
With this clear, you can now do your task as a founder as you adopt the double-trigger acceleration method both for the founders and the employees. To understand more about the other areas of being a founder, distributing stocks and tax-related issues, check out the knowledge-based articles here!