Double Trigger Acceleration: Boom or Bust?

This article is adapted from Chapter 16 (“Trigger Happy”) of my newly released career guide for startup employees.

The Startup Lottery: Your Guide to Navigating Risk and Reward.?

The book provides essential career advice for startup joiners on how to weigh opportunities in early-stage ventures, understand the dynamics of venture-backed companies, and evaluate equity-based compensation.?

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Double Trigger Acceleration: Boom or Bust?

For most employees in startups, the option vesting schedule is what it is. You receive a grant and your right to exercise the option vests over a three- or four-year period. Maybe 25 percent vests on the first anniversary of the grant. Then the remainder vests monthly for the remaining period of the vesting schedule.?

In rare cases, grants can vest more quickly through a feature known as acceleration. Acceleration of options or RSUs is one of the most valuable features you can have in an equity grant, as it can have the greatest impact on the overall worth of your grant at the time of exit.

Acceleration

Acceleration is the process by which unvested incentive options or RSUs become vested immediately when predefined events happen. The immediacy of the vesting means that you do not have to wait for the vesting schedule clock to run out. When you consider that the economic value of an option or RSU grant is not valid until that grant vests, acceleration is a big deal.?

The most common event that causes accelerated vesting of grants is the sale of the company, known as a change of control. Change of control means that new owners have taken control of more than 50 percent of the voting stock of the company, and the prior shareholders are no longer in charge.

If you have a stock grant with full (100 percent) acceleration based on a change of control, your entire grant vests in conjunction with the sale of the company. When a company is purchased in a cash transaction, you get paid the full value of your stock if you have RSUs or the bargain element of your entire option grant (i.e., the difference between the stock price and your option exercise price) at the time of the sale.

The disappointing news for most employees is that acceleration is not a standard feature of most incentive equity grants. Most companies do not provide acceleration to their regular staff and bristle at even offering it to executives. From the company’s perspective, acceleration is a superpowered feature of an offer to a new employee. The company must weigh the risk that an employee whose grants fully accelerate upon a change of control no longer sees value in staying at the company. At that point, the buyer has to offer them new financial incentives to keep them from walking away.

If key team members have little incentive to stay, the buyer may rightfully fear that the team is a house of cards that falls apart after the sale closes. Or they might be forced to offer rich incentives to retain key employees, making the deal more expensive and less attractive. Prior to closing, the buyer will closely examine employment terms for key employees. Concerns regarding post-transaction retention may derail the deal or result in some employment terms getting modified before the deal closes.

Partial Acceleration

One way employers thread this needle is by offering partial acceleration on change of control instead of full acceleration. Acceleration is not an all-or-nothing feature of equity grants. The employer can offer any amount of acceleration from zero (the most common) to 100 percent (the rarest). C-suite executives and board members may get full acceleration, VP-level executives may get 50 percent (or 25 percent) acceleration, and employees below VP level get no acceleration at all.

The thing to remember is that the acceleration applies only to the remaining unvested portion of the grant. If you have been with a company for three years, your initial grant with a four-year vesting schedule is already 75 percent vested. If you have 50 percent acceleration, the incremental portion of your grant that vests is just 12.5 percent (50 percent of the remaining unvested 25 percent). Getting that 12.5 percent acceleration is nothing to sneeze at, but as a retention tool, that amount of acceleration can be marginal.

Triggers

A commonly used term for an event that results in accelerated vesting is trigger. Trigger is not a legal term but rather a colloquial reference to the catalyst that leads to partial or full acceleration. When the board of directors is considering the structure of equity grants, triggers are always a heated topic of conversation.

Discussions about partial or full acceleration pit the interests of shareholders against the interests of employees. As fiduciaries, the board must preserve value in the company for the shareholders. With accelerated vesting, any additional payouts to employees come directly from the pockets of shareholders, who, in most cases, are the investors. The senior management team is the intermediary. Depending on their point of view, they may lean toward being more or less generous to the staff. That orientation influences how hard they fight the board for terms advantageous to the staff.

A standalone event such as the sale of a company that results in the acceleration of equity grants is known as single-trigger acceleration. Companies may not want to give single-trigger acceleration to key employees, but neither do employees want to lose out on the value of their unvested options in case of a sale.?

To balance the risk between employer and employee, options can contain an acceleration provision that kicks in if the employee is terminated after a change of control. This joint contingency—sale followed by termination—is known as double-trigger acceleration.? It occurs if an employee is terminated without cause after the sale.

The theory of double-trigger acceleration is to protect an employee who stays on after an acquisition from losing their unvested options if the company terminates them. You can imagine a scenario where a company completes an acquisition, and all the shareholders get paid. Then some employees are fired so the acquiring company can recapture their options.?

Depending on how critical they deem the employees, this could be an economically rational decision for the buyer. They could reduce cash burn while also saving millions of dollars in employee compensation down the road. Double-trigger acceleration mitigates that risk for the employee.

Although double-trigger acceleration is better than no acceleration, it is not a perfect way to avoid risk for employees. While you might take comfort in having this acceleration clause in your contract or offer letter, double-trigger acceleration has several drawbacks, especially if another private company or private equity firm acquires your company.

First, an acquirer does not have to accept the transfer of your options. The acquirer’s compensation and stock plans may differ from that of the acquired, and meshing the two may be complicated. This mismatch could create imbalances in the incentives between the acquirer’s existing employees and the team they absorb through the transaction.?

So, the acquirer may decide to terminate all remaining unvested options as a pre-condition of closing on the transaction, causing existing employees to lose the value of their unvested options. In this case, the buyer will create new incentive plans for the incoming employees, which may be less generous and will likely result in vesting starting over from scratch.

Second, even if the acquirer agrees to roll your options into their plan, you will not be paid on the value of your vested options if you are terminated without cause. Your previously unvested options accelerate after the second trigger (termination), but you are still left holding vested options that must be exercised, usually within 90 days of when you leave, or they are forfeited.?

If you are suddenly out of work, you may not want to write a check to the company that just fired you to exercise options that you are not sure will be worth anything down the road. So, despite the acceleration clause, you may still lose the value of your vested options.

Third, most double-trigger features only kick in if you are terminated without cause within a specified period, usually no longer than 12 months. Your employer could wait until after 12 months to take action. You would get the additional 12 months of vesting post-acquisition but lose your remaining unvested options upon termination. So double-trigger acceleration is not a panacea to ensure you receive full value from your options.

Finally, if you are forced to exercise within 90 days of termination, you face a real dilemma. After exercising your options, you may have to wait years to realize a financial benefit from an exit, assuming it ever comes. While you are holding the stock and unable to turn it into cash by selling it, you risk the stock’s value going down, maybe even to zero.

The Bottom Line

Depending on your position and leverage in your company, you may be able to negotiate for accelerated vesting. It can happen when you join. It can happen once you have proven yourself to be indispensable. It might take threatening to leave for management and the board to agree to provide it. The two levers to negotiate are single- versus double-trigger and what percentage of your unvested options the acceleration applies to.

If you are able to negotiate for acceleration, start by asking for 100 percent acceleration with a single trigger and work your way down from there. You may not be able to get single-trigger acceleration on 100 percent of your unvested options but getting it on 50 or even 25 percent of your options can be highly valuable.

If you end up with double-trigger acceleration, you are much better off than the average option or RSU holder. In some cases, employees are terminated at the time of acquisition. This is especially true if you are in administrative functions, such as finance and human resources, that a buyer might find redundant. If that happens, double-trigger has the same practical effect on vesting as single-trigger acceleration. Just recognize that there are numerous ways the buyer’s actions may end up undermining the value of double-trigger acceleration.

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Gus Bessalel is the author of the #1 Amazon Best Seller and Top New Release, The Startup Lottery: Your Guide to Navigating Risk and Reward. The book is an essential guide for anyone considering a career in startups.

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A former Inc. 500 CEO, serial entrepreneur and 30-year veteran of startup life, Gus has a BA and MBA from Harvard University and started his career in management consulting at Bain & Co. He was also the Co-Founder of Compass Pro Bono, a volunteer consulting organization that advises nonprofits. He mentors young companies and entrepreneurs and writes about startups and business, among other eclectic topics.

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