Accelerated Vesting – Step on the Gas Pedal of Equity Ownership

I have discussed vesting in a prior blog post “Let’s Talk about Vesting,” now we can focus on acceleration of vesting.

What does acceleration of vesting mean?

Rather than waiting for equity to vest over time, a service provider’s equity can become partly or fully vested upon the occurrence of certain events.  These events and acceleration provisions are included in the company’s stock plan or in the grant or award to the individual service provider. Two common types of acceleration are discussed below.

There are two common types of vesting acceleration “Single Trigger” and “Double Trigger.” 

Single Trigger provides for acceleration upon the occurrence of a single event, i.e. the sale of the company.

Double Trigger provides that, upon a sale of the company (1^st trigger), there is no acceleration.  Vesting accelerates on the 2^nd trigger which is generally (a) a period of time passing after the 1^st trigger, 12 months is common, and/or (b) the acquirer terminating the service provider without cause during a specific period of time after the 1^st trigger. Note that the Double Trigger acceleration only works if the acquirer assumes the equity plan and the equity plan is still in existence at the time of the 2nd trigger.

Should founders argue for or implement single trigger acceleration?

Maybe.  Many founders believe that they should have a right to “cash out” upon the sale of their company.  They put in the hard work and deserve to profit from it; however, the purchase price of a company may be lower if the founders are not staying with the company after an acquisition.  Additionally, venture investors may not view the company as favorably with Single Trigger acceleration.  A company is often valued based on the strength and capacity of the founders and key service providers.  Have you watched Shark Tank?  How many times to the sharks say – I’m investing in this company because of you!  Start ups often change their product, strategy and revenue model; however, the ingenuity and drive of the founders remains the same.

Which type of acceleration is favored by venture investors?

Many VC investors favor Double Trigger equity awards because they feel that the founders are key to the company’s success and would like the founder to stay with the company, rather than give the founder the ability to cash out on a Single Trigger change in control.  VC investors may also believe that the acquisition purchase price would be higher if the acquirer has comfort that key service providers will stay with the company.

Should founders establish vesting terms prior to receiving venture investment?

In the case of multiple founders – YES!  Vesting avoids inequity, if there is no vesting in place and a founder leaves the company, they will still own all of the shares they are issued.  With vesting, the unvested shares would either be forfeited or repurchased by the company (at the low price that the founder paid).  The founder has to do the work over years to own the piece of the company. Vesting also avoids dilution (the reduction in value of shares due to the issuance of additional shares) because, if a company needs to replace the service provider that has left, they will typically need to issue some sort of stock package to the replacement. The repurchase or forfeiture of the stock avoids dilution from issuance of additional shares with the new hire.

This article is for informational purposes only and should not be taken as legal advice. It may not reflect the current law or the law in your jurisdiction. When acting upon the information presented herein, seek advice of counsel in the relevant jurisdiction.