Single Trigger Acceleration

A single-trigger acceleration is a full or partial acceleration of vesting of someone’s stock (options) based on a single event.

A single-trigger acceleration is a full or partial acceleration of vesting of someone’s stock or options based on a single event. The trigger for acceleration is the event. Key executives and founders negotiate into their agreement for equity that they will be entitled to a form of vesting acceleration upon a triggering event.

What Is Single Trigger Acceleration?

A single trigger acceleration is a provision in equity agreements that causes the immediate vesting of some or all of an employee’s unvested stock options upon the occurrence of a single predefined event.

Common Triggering Events For Single Trigger Acceleration

The most common trigger event is the:

  • Sale or change of control of the company
  • Involuntary termination of employement

A typical triggering event is the sale of the business, but it can also be the termination of employment. The acceleration that is solely triggered by the sale of the organization is known as a single trigger acceleration. In connection with the sale, this will result in all or some of the vesting restrictions ceasing.

If an involuntary termination triggers acceleration, it is a less popular form of a single trigger and may introduce many issues. It may also be a part of the severance package for an executive.

Single Trigger Acceleration: Red Flag to Investors and Acquirer

Investors usually dislike the single trigger acceleration upon a sale. They do not like this because they have concerns that it will push a potential acquirer away. Typically, an acquirer wants the ongoing operations to be secure and continue smoothly with his business’s integration.

The acquirer will have to take a higher retention package to retain the key employees if the vesting scheme in place for key employees ceases. A more comprehensive post-closing plan will make the transaction expensive for the acquirer. It can also be offset by reducing the consideration for the shareholders and accelerating the closing options.

Drawbacks of Single Trigger Acceleration

There are several significant drawbacks of single trigger acceleration:

  • Retention Issues – This can lead to key employees leaving soon after an acquisition, which disrupts business continuity and integration
  • Increased acquisition cost – Acquires need to offer high retention packages to keep employees after their equity vested, which makes transactions more expensive.
  • Dilution of investor returns – Accelerating options at closing shifts consideration away from investors and other stockholders to the employees with special vesting acceleration.
  • Negotiation challenges – This can complicate deal negotiations and cause diligence issues in financing rounds.
  • Misaligned incentives – This may incentivize employees to prioritize a quick sale rather than focusing on the long term success of the company.

These drawbacks explain why investors and acquirers prefer double-trigger acceleration, which provides more balanced protection for both the company and employees.

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Single-trigger acceleration can be induced by involuntary termination and become part of severance pay. It’s not common and doesn’t favor the employer. With this arrangement, key employees can quit after an acquisition, making it difficult for the purchaser to maintain the team and potentially costing the acquiring firm more than intended.

Businesses, investors, and shareholders can monitor, manage, and decide wisely regarding their companies’ equity with Eqvista. Businesses, investors, and shareholders can monitor, manage, and decide wisely regarding their companies’ equity with Eqvista.

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