You may have heard people refer to “double-trigger” acceleration. What are they talking about? Double-trigger acceleration refers to the partial or full acceleration of vesting of someone’s options or stock based on the occurrence of two distinct events. Each event is a “trigger” and if both events occur, that is a “double trigger.” Let’s first take a look at “single trigger” acceleration to set the stage.
Some founders and key executives negotiate into their equity arrangements that they will be entitled to some form of acceleration of the vesting on their equity upon the occurrence of a triggering event. This is not the norm, even for founders and key executives, and almost unheard of for rank-and-file startup employees.
Typically, the triggering event is the sale of the Company, but can also be an involuntary termination of employment. Acceleration triggered solely by the sale of the Company is called “single-trigger” acceleration, and results in some or all of the vesting restriction lapsing in connection with the sale. This is designed to reward the employee for his/her contribution to a “successful” outcome for the Company. Acceleration triggered only by involuntary termination (sometimes negotiated to be termination without “cause” or for “good reason”) is another less common form of “single trigger” acceleration. Investors tend to dislike single trigger acceleration upon a sale out of concern that it will turn off a potential acquirer. An acquirer typically wants to secure the ongoing services of key team members so as to ensure continued performance of the business and smooth integration into the acquirer’s business. If the vesting scheme in place for those key members disappears at closing, then the acquirer will generally have to offer a more meaningful retention package to get the key employees to remain with the Company post-acquisition. A larger post-closing retention plan either makes the transaction more expensive for an acquirer or is offset by lowering the purchase price, leaving less consideration for the stockholders generally, and accelerating options at closing of a sale also shifts consideration away from the investors and other stockholders to the employees with the special vesting acceleration. Acquirers may also be concerned about the prospect of handing over life-changing amounts of cash to executives and then trying to formulate retention packages that are sufficient to actually get them to remain in their jobs through the sometimes difficult period of post-acquisition integration, a time when these employees may have new bosses and uncomfortable new levels of corporate bureaucracy.
Single trigger acceleration based on involuntary termination is somewhat more unusual and introduces a different set of issues, in that vesting becomes less about the employee being effective enough to keep his or her job than about the financial consequences of letting him or her go. If the employee has a relatively large equity position, it can make it very difficult to replace or demote that employee without meaningful dilution to the remaining stockholders.
Double-trigger acceleration, as the name implies, requires two events to trigger acceleration – most typically the sale of the Company and the involuntary termination of the employee, usually within 9-18 months after closing, and in some cases including a short pre-closing window to counter any preemptive termination by the Company to avoid a payout. Typically the termination means termination by the Company without “cause,” but can also include resignation by the employee for “good reason” (e.g. a cut in pay, mandated relocation or significant downgrade of duties). Double-trigger acceleration has become very popular with early stage companies and aims to align the interests of the employees, the investors and potential acquirers by (i) providing a safety net for key employees, some of whom may be removed in the consolidation during post-closing integration – CFOs and GCs are particularly susceptible, (ii) reducing dilution from automatic acceleration, and (iii) easing the qualms of the acquirer by preserving the requirement of ongoing service to the Company in order to vest. Fundamentally, a double trigger is designed to protect a startup employee from being terminated by an acquirer in connection with integration or as an economic decision where the value of the unvested equity into which the employee can vest is materially greater than the cost to the acquirer of finding a replacement for the employee. Without any acceleration feature, a key contributor could find him/herself in the unfair position of having been too successful by growing and selling a business before all of his/her equity has vested and losing the value of that unvested equity if the acquirer decides not to keep the employee around.
Because option grants to startup company employees have become a ubiquitous method of aligning employee and Company incentives and rewarding employees on the sale of the Company, attention needs to be paid to the question of what happens to unvested options, particularly those held by key employees, when the Company sells. While single-trigger vesting addresses this problem, it is a fairly blunt instrument that may spook potential buyers. Double-trigger acceleration has grown increasingly popular among emerging companies as a nuanced approach to granting equity while balancing the various interests of employees, investors and potential acquirers alike. To technically follow double-trigger acceleration, however, those underlying options need to be assumed by an acquirer, which they sometimes are and sometimes are not. Single-trigger acceleration remains relatively less common, and investors will often be more likely to push back against such provisions.