In addition to the five important considerations for founder vesting schedules discussed in 5 Important Considerations for Founder Vesting Schedules, founders also need to decide whether their shares should be subject to acceleration and if so, what form of acceleration to choose.
If you’re hazy on what “vesting” means, basically it describes when stock, which previously was subject to restrictions (commonly referred to, rather unimaginatively, as “restricted stock”), ceases to be subject to those restrictions (see Why is Vesting Important for Founders).
What Does Acceleration Mean?
Acceleration provisions provide that if certain events occur, restricted stock that a founder holds that would not have otherwise been vested at that time, will accelerate and become vested as a result of the triggering event.
There are many flavors of acceleration, differing in the type of triggering event, the amount of shares accelerated (all or just a portion), timing involved and whether there is one trigger event or multiple events.
The two most common forms of acceleration provisions are single trigger and double trigger. For both, the main triggering event is typically the sale or change of control of the company.
Single-trigger acceleration provisions typically provide that upon a sale or change of control, all or some portion of the restricted stock will immediately become vested. This is called a single trigger because once the sale or change of control occurs, no additional event (i.e., no second trigger) must happen for the acceleration to kick in.
By contrast, double-trigger acceleration provisions typically provide that upon a sale or change of control (i.e., the first trigger) no acceleration occurs and rather the restricted stock will only accelerate if the founder is then terminated without “cause” or leaves the company for “good reason” (these terms should be defined in the equity grant documentation) within some set time period (typically six months to one year following the sale or change of control) (i.e., the second trigger). So, if a sale or change of control occurs, but the founder is kept on beyond the expiration date of the second trigger, there would be no acceleration, because only one trigger occurred. By contrast, if a sale or change of control occurs and the founder is let go “without cause” within one month of the first trigger, then the double-trigger acceleration provision would kick in and all or some portion of the restricted stock would be accelerated.
Who Receives Acceleration?
Acceleration provisions apply to founders or key employees of a company much more commonly than for rank-and-file employees who join the team later in the game. For these rank-and-file employees, time-based vesting alone is typically viewed as providing sufficient compensation (in particular given that these employees will also be receiving cash compensation from the start of their employment).
By contrast, founders and early key employees likely received larger equity grants and lower cash compensation, even though they played a more integral role at the company. As a result, for these individuals, if a sale or change of control occurred before their shares have vested, they would lose a significant part of the value that they had been working to create.
Most founders initially think they should have single-trigger acceleration. After all, if the company is sold, they have earned all the restricted stock they were granted, right?
However, most venture capitalists (VCs) do not want to invest in companies that have single-trigger acceleration as they believe this may hinder the companies’ exit opportunities and therefore the VCs’ return on investment, and here’s why:
Start-up investors are usually buying into a company because they believe in the founders and the founders’ ability to make the company a success. Given this belief that the founders are critical to the success of the business, start-up investors will be very leery of a single-trigger vesting structure which would allow the founders to walk away from the company and potentially leave it floundering following a sale or change of control. Such a structure is viewed as greatly complicating the investor’s eventual sale of the company, as potential acquirers will be reluctant to acquire the business (and will likely pay less for it) if they do not have some level of comfort that founders and key employees will continue to work hard for the company after the sale. As a result, start-up investors will often choose not to invest in companies with single-trigger vesting, or will require the change of single-trigger provisions to double trigger as a condition to their investment.
For these reasons, we typically advise that if you are going to include acceleration as part of founder equity grants, in most instances including double-trigger acceleration provisions is preferable to including single-trigger acceleration.