Vesting: Single versus Double Trigger Acceleration

Most vesting provisions for restricted stock or stock options ("incentive equity") include acceleration provisions as insurance of sorts for employees and founders ("service providers").

The underlying concept is this: incentive equity typically vests on a four year schedule (as per market standard). Absent acceleration, if an event were to occur before the end of those four years - such as a sale of the all the assets of the company, a merger, or an IPO - that resulted in the service provider's termination (or resignation with good cause), then she'd lose the benefit of her expectation. She'd lose the right to the portion of the equity that hadn't vested - which happens to be precisely what certain interested parties (investors, new management/ownership, etc.) would like to see happen (because unvested restricted stock effectively vanishes and the rest of the shareholder base benefits proportionately from the reverse dilution) and why termination is such a real risk.FN1

Acceleration triggers guard against this. "Single" trigger refers to the automatic vesting of any unvested incentive equity upon the said event. "Double" trigger requires two events before the automatic vesting - not just the merger but the actual termination or early release of the service provider.

A common acceleration agreement averages the two triggers: combining 25% – 50% single trigger acceleration with 50% – 100% double trigger acceleration. Fairly convincing arguments are made that double trigger acceleration best balances the interests of service providers with interests of the company (entire shareholder base).FN2

It's all pretty straightforward stuff. One point to note: the trigger should run for a period of time before as well as after the transaction that constitutes the trigger event (or otherwise be constructed to to avoid any preemptive house cleaning before the transaction is done).

FN1.The assumptions behind the logic of what interested parties will want in the event of a merger/sale can get speculative but generally, regardless if the acquirer's interest is in company assets or people and /or if the equity at issue is unrestricted stock or stock options (Stock options, in contrast to unrestricted stock, "return" (to the extent they ever left) to the pool of stock reserved for employees (usually 5%-15% of the outstanding stock)), acceleration clauses will likely decrease the purchase price. To the extent there are provisions in place (such as unvested equity) that incentivize service providers to stick around the acquirer will see and presumably pay for that additional value. Although the acquirer could separately create (and pay for) an employee/management retention mechanism as part of the deal, that payout would (for the rational acquirer) carve-out from the overall deal value, reducing the consideration allocated to the target company stockholders. Note here the conflict of interest between VC investors and the service providers being bought out).

FN2. A variation suggested here is single trigger plus a minimum X (say 12) months of service before the out.