When a founder, employee, or other service provider has shares or options subject to vesting, one common issue they may want to solve for is how unvested equity is treated at the time the Company is sold—single- and double-trigger-acceleration are two common approaches, although single-trigger tends to be more controversial.
What is Acceleration?
Acceleration refers to a provision in a stock option or restricted stock agreement that automatically accelerates the vesting of the equity if certain pre-defined events occur, such as (1) a change in control of the company or (2) termination of the holder’s services without cause (let’s call this a “trigger event”). Upon the trigger event, the holder’s equity will vest automatically, regardless of how long she has been with the company (i.e., time-based vesting) or the other conditions to vesting.
Types of Acceleration
Single-Trigger Acceleration. Although technically the trigger event could be anything that’s contracted between the parties, by far the most common “single-trigger” event occurs upon the sale or change of control of the company. As such, when most people talk about “single-trigger acceleration,” they mean a provision that provides that all or a portion of any unvested shares will accelerate (aka vest immediately) upon the completion of the sale or change of control of the company. This form of single-trigger acceleration essentially serves as an incentive for the holder to work towards building the company to be ready for an acquisition event of some sort, as fast as possible.
Single-trigger acceleration is not particularly common, largely because potential purchasers of startups place value on retaining services of the founders or key members of the management team for a period of time following the closing of an acquisition. If a desired key team member receives a large payout upon the acquisition or similarly receives fully vested equity at the time of the sale, an acquirer may fear that the key member will depart shortly after the acquisition and/or be less committed post-acquisition given the lack of incentives. As a result, the “single-trigger” approach is strongly disfavored by acquirors, and therefore investors, and so this can cause diligence issues in financing rounds.
Double-Trigger Acceleration. On the other hand, double-trigger acceleration provisions requires that two triggering events occur before the employee’s equity can vest. The market and standard approach is that, (1) first there must be a sale or change of control of the company, and then (2) the founder or key service provider must be terminated without cause or resign for good reason (such as a significant reduction in pay or responsibilities, being asked to move across the country, etc.) within some set period of time surrounding the sale or change of control. For example, if a sale or change of control occurs and the equity holder is terminated without cause within three months after the closing of the sale or change of control, then the two triggers have occurred and all or a portion of the unvested shares would accelerate. In contrast, if the Company is sold and the equity holder continues working, there would be no acceleration. For double-trigger acceleration to work properly, the holder’s equity needs to be assumed by the acquiror, which is usually something that’s negotiated at the time of the acquisition.
Acquirors (and therefore investors) strongly prefer double-trigger acceleration over single-trigger acceleration because it offers greater protection to the acquiror while still incentivizing the equity holder to stick around following the sale.
Who Receives Acceleration?
While founders or key employees often seek to include acceleration on their equity, the typical startup employee is usually not offered any form of acceleration. Even double-trigger vesting can be looked at skeptically by acquirors and investors when used broadly, and so startups usually are encouraged to leverage it as a retention tool or hook to land an important candidate.