When certain conditions are met, vesting can be expedited from the standard timeline that an equity grant would otherwise vest. This is called vesting acceleration.
While accelerated vesting is beneficial to the equity holder, companies should take care when including acceleration in equity grants. Factors such as the type and quantity of vesting acceleration provisions may alarm investors or potential buyers.
Defining your company's philosophy around vesting acceleration starts with an understanding of the varieties of acceleration and the market trends that surround each.
Single-trigger acceleration is uncommon, except for advisers
Single-trigger acceleration typically provides for partial to full acceleration of vesting upon a change of control event, such as an acquisition. The "trigger" is the change of control. Most companies generally do not award equity with single-trigger acceleration, but when they do, it is typically to advisers who negotiate for it.
Companies tend to be more comfortable with single-trigger acceleration for advisers because a typical adviser grant is relatively small. Advisers often provide services early in the company’s lifecycle, when an acquisition is unlikely during the vesting period, making this an often inconsequential term.
Double-trigger acceleration is fairly common among founders and executive hires
Double-trigger acceleration usually provides for partial to full acceleration of vesting upon termination within 12 months after a change of control event. Both the change of control trigger and the second, termination trigger must occur for the vesting to accelerate.
Double-trigger provisions protect key personnel from the company being acquired. The provisions ensure that their stock will immediately vest if they are not kept on by the buyer, so long as they aren’t terminated for cause.
Double-trigger acceleration is uncommon, but not unheard of, for other employees
While double-trigger acceleration is commonly employed to protect founders, it is much less common to offer it to all employees. If every employee were given double-trigger acceleration, a potential buyer would struggle to make personnel changes without a prohibitive number of shares being granted to departing employees via acceleration provisions.
While each company should develop its own compensation philosophy, founders should design compensation with care because it can become strategically important down the line.
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Disclaimer: LTSE is neither a law firm nor provides legal advice. Before making decisions on matters covered by this post, readers should consult their legal adviser.