One common problem that founders, employees, and other service providers may wish to address is how unvested equity is handled when the company is sold. Single- and double-trigger acceleration are two popular methods, though single-trigger tends to be more contentious.
Read on to learn more about double- and single-trigger acceleration
Definition Of Terms
Acceleration
Acceleration is the term for a clause in a restricted stock agreement or stock option that, in the event of certain pre-defined events (such as (1) a change in the company’s control or (2) the holder’s services being terminated without cause; let’s call this a “trigger event”), automatically accelerates the vesting of the equity. The holder’s equity will immediately vest upon the trigger event, independent of her length of service with the company (time-based vesting) or the other requirements for vesting.
Triggers
Trigger is a term that’s frequently used to describe an event that leads to rapid vesting. The term “trigger” refers to the catalyst that causes either partial or complete acceleration; it is not a legal term. Triggers are a hot topic of discussion whenever the board of directors is debating the equity grant structure.
The interests of shareholders and employees are pitted against each other in discussions regarding partial or complete acceleration. The board has a fiduciary duty to protect the company’s worth for the benefit of the shareholders. Any additional payments to employees under accelerated vesting come straight from the shareholders’ coffers, who are typically the investors.
The middleman is the upper management group. They might err on the side of generosity toward the personnel, depending on their perspective. Their inclination significantly influences their push for board terms that benefit the workforce.
Furthermore, single-trigger acceleration refers to an event, like a business sale, that triggers an acceleration of equity grants. Not only do employees not want to miss out on the value of their unvested options in the event of a sale, but companies may also be reluctant to provide single-trigger acceleration to key personnel.
Double-Trigger Acceleration
When there are two separate triggering events, someone’s stock or options may vest earlier than expected. This is known as double-trigger acceleration. If you sell the business and are fired without cause soon after, your unvested stock as the founder may increase.
The particular timetables and triggers may vary based on your contract. Additionally, there are single-trigger vesting clauses, which only need one occurrence to accelerate vesting. As a founder, you might wish to exercise caution when implementing vesting terms with a single trigger. Even though they might be advantageous to you, the clause might turn off potential investors from investing in your business.
Acceleration clauses with two triggers are used a little more frequently. On rare occasions, founders, key personnel, investors, and advisors receive them. The provisions in place can prevent the company’s founders and developers from being unjustly dismissed if it is acquired.
Double Trigger’s Advantages
Acquirers might reduce their risk of losing important employees once a deal closes by arranging double-trigger acceleration with core staff.
Given the significant expense of instantly awarding stocks and shares to every employee, it provides greater security for the worker. Potentially, there could be more job stability.
When it comes to employees who want to quit the company but don’t want to forfeit their vested shares, investors or acquirers stand to gain more from double trigger acceleration than do departing employees.
Cons of Using a Double Trigger
If an employee is terminated before a sale or if a “change of control” fails, they risk losing their expedited vested shares. Important employees may get dissatisfied as a result; therefore, it’s important to make sure you have enough HR specialists available to supervise a deal through to completion. By making sure an M&A transaction is completed successfully, you can reduce disappointment.
Single Trigger Acceleration
Simply put, a single occurrence known as “single trigger acceleration” renders the vested stock options instantly payable. This one trigger, which is typically released upon the conclusion of the M&A, needs to be contractually agreed upon.
Advantages of Acceleration with a Single Trigger
There are no significant advantages for investors or corporations involved in the M&A deal from a single trigger acceleration.
The primary advantages belong to the employee, who receives a sizeable stock payout, the freedom to quit the company at any time upon acquisition, and no obligations in the form of vested shares.
The ultimate goal of a deal is successful completion, which is typical for strategic partners and board members supporting the M&A lifecycle.
Cons of Acceleration with a Single Trigger
Investors often steer clear of single-trigger acceleration deals due to the substantial risk of numerous personnel leaving the company post-purchase. Renegotiating excellent benefit programs is crucial for the new business to retain key personnel after their vested stock has fully paid off.
What is it Vesting?
Vesting is a strategy that ensures cofounders who leave early in a company receive the same salary as those who remain for a longer period.
The process involves the forfeiture of an employee’s or co-founder’s equity interest, or the company’s buyback, upon their departure.
Why Should I Use a Vest?
It lowers the amount of taxes owed by issuing stock all at once rather than in smaller increments over several years.
This gives co-founders a significant upside while lowering the startup’s risk and enabling the business to repurchase unvested shares at the extremely cheap original acquisition price when a co-founder departs.
The business can reclaim unvested stock if founders leave before their tenure or if an employee is not a suitable fit. The vesting schedule will dictate how much of the startup can be repurchased.
The fired individual can only exercise the shares that were vested at the time of their termination. Depending on how long the fired employee worked for the organization, any unvested options would not be exercised.
FAQs
Which Is Better, a Single Trigger or Two Triggers?
Top-tier professionals may find the double-trigger approach more appealing during recessions since it protects them from future role changes or job losses. Single-trigger acceleration’s versatility, meanwhile, might be more advantageous when showcasing your competitiveness to prospective hires.
Who is the Founder of Double Trigger Acceleration?
Acceleration clauses with two triggers are used a little more frequently. On rare occasions, founders, key personnel, investors, and advisors receive them. These provisions can shield the company’s founders and developers from being abruptly and unjustly forced out of their jobs if it is acquired.
What Advantage Does Dual Trigger Offer?
In cycles involving gonadotropin-releasing hormone antagonists and human chorionic gonadotropin, a dual trigger that combines these two hormones greatly increases the live birth rate for normal responders.
A Dao Trigger Is What?
Pulling the trigger of a DAO pistol initiates two actions, similar to those of a conventional double-action revolver: cocking the striker or hammer and discharging the weapon. But unlike a typical DA, a DAO’s mechanism is only meant to fire when the trigger is pulled, so you can’t manually cock the hammer.
Bottom Line
You might be in a position to bargain for faster vesting, depending on your standing and influence inside the organization. It could occur after you sign up. Once you’ve shown that you are indispensable, it may occur. For the board and management to agree to offer it, they may need to threaten to resign. The two levers to work with are whether the acceleration applies to a proportion of your unvested options or a single- or double-trigger.
Also, Read
