In your exploration of the startup world and how startups compensate founders and employees you probably have questions around things like vesting or what is single and double trigger acceleration.
What is Single Trigger Acceleration?
A single trigger is any kind of event that causes an acceleration of the pre-set vesting schedule. Acquisition, or any change of control, of a startup by another company is the event that generally triggers these accelerations.
A single trigger acceleration typically causes the full vesting, or accelerated vesting, of a founder or employee startup equity at the time it occurs, regardless of the vesting cliff. If you have all your equity already, why stay? Currently these are waning in popularity amongst most startups due to the difficulty they can create with employee retention. For the most part, it’s up to your purchaser.
Some VCs won’t even consider a deal with a single trigger acceleration attached, whereas others may not mind, especially if the terms have been on the books since the founding of the company.
This may lead to the next question:
What is a Double Trigger Acceleration?
Double triggers are made up of two distinct triggers: the first is the change of ownership, and the second can be a number of conditions.
In practice, double triggers could be anything as simple as termination without cause or job change, or anything as seemingly arbitrary as a change in service providers or team size—or even as personal as the distance the founder has to drive to get to work. If yours may seem arbitrary, expect to defend them at the time of any fundraising.
Double trigger accelerations have replaced single triggers in the terms of most founder and employee agreements today. Along with double trigger accelerations, you must understand how vesting and accelerated vesting works.
What is vesting?
Vesting is an instrument used to ensure fairness so that a cofounder doesn’t leave early on and still get the same financial compensations as the other co founders who stayed with the company for a longer time.
Vesting means that equity interest held by someone (a co-founder or employee) is subject to forfeiture (the repurchase by the company) when that person leaves the company.
Reasons to use vesting?
By issuing stock on day one instead of smaller increments over a period of years, it reduces the amount of taxes due.
By doing so and still allowing the company to repurchase unvested shares when a co-founder leaves at the very low initial purchase price a large upside is being given to co-founders whilst also reducing the downside for the startup.
In essence, if founders leave early or you find out an employee isn’t the right fit after all the company can recapture that unvested stock. The amount the startup will be able to repurchase will be determined by the vesting schedule.
Set up and manage your startup effortlessly.
Capbase allows you to easily set up your stock plan, issue equity to co-founders and employees, and create custom vesting schedules that let you adjust the percentage of unvested shares subject to double trigger acceleration.
A vesting schedule is the mechanism that measures the amount of vested equity that a stockholder has at any given time. Usually, the vesting schedule is time based (four years with a one years cliff), but a vesting schedule can be based on milestones, too, although this is less common.
Generally stocks vest on a monthly or quarterly basis after the cliff, the purpose of the cliff is primarily to let the company, and the employees to some extent, figure out if it’s a good match.
Repurchase price of unvested shares
Usually, there is at least a minimum amount of consideration for the company’s repurchase of unvested shares. In the respective contract, the repurchase price is usually the lower one of two - the current FMV per share or the original purchase/grant price. Since shares are typically purchased by founders for $0.000001 per share (and a total under $100) the repurchase price is usually a nominal amount.
Going back to accelerated vesting
Many new startups may ask how common are double trigger accelerations? It varies to some degree but you can find here an article from Angelist’s Naval with his conclusions from chatting with a set of founders.
In most cases, legal language for what happens in the case of these trigger events is present in the original vesting terms and is quite simple. In fact, if you don’t have said legal language in your vesting terms, you may want to consider it now—it can’t really be added at the time of acquisition and will give you ammo for negotiation!
In practice, the amount of company equity, the vesting schedule and even the triggers themselves may all be negotiated again at the time of acquisition. Note that these provisions are only really accessible to founders and select key employees. Founders can reasonably create provisions for full vesting; employees are typically given a year of vesting at the maximum.
Trigger accelerations are often a hotly debated topic (especially in companies acquired by VCs) as any outstanding equity will impact the value of shares of the purchase price. In the case that vesting terms are accelerated at acquisition, the purchaser will often include a management retention incentive as part of the deal, which also has a cost. Here’s how triggers look:
Double trigger accelerations are best placed to align the interests of the founder/employee and the acquiring interest. The acceleration allows companies to continue to incentivize loyalty over the vesting period with equity compensation, and they allow companies that have just acquired new properties to avoid the large cash payouts that can occur as the result of a single trigger. Because of this, the trigger conditions of founders and key employees will likely come up in any merger and acquisition (M & A) negotiations.
On the employee side, double trigger acceleration serves as financial compensation and two scenarios can play out: you may have unvested shares, and therefore one of three things is likely to happen, or you may have vested shares. In the case that the new management deems it financially or otherwise advantageous to terminate the founder or otherwise change the terms of the founder’s employment after acquisition, the founder’s shares vest. In some cases, the threat of the double trigger may be used as leverage to shore up a hostile situation.
Most contracts include clauses specifying the period of the second trigger event relative to the acquisition. A particularly generous term would cover the time period 3 months before and extend a year after the qualifying event. Because these events impact the amount of vested equity that is available over a certain period of time, there may be additional tax liabilities related to them—even if you’ve filed a section 83 (b) election.
- Single-trigger accelerations cause the full or partial vesting of employee stock.
- Double-trigger accelerations are more popular in the startup world today.
- The typical triggers of a double trigger acceleration are change in company ownership and the termination of an employee without cause.
- Most founder share purchase agreements include terms for a pre-authorized buyback of unvested shares.
- If an employee leaves for “good reason” (e.g. changing roles) they may also trigger an acceleration of the vesting of their stock options.
- A vesting schedule is the mechanism that measures the amount of vested equity that a stockholder has at any given time
- Vesting means that equity interest held by someone (a co-founder or employee) is subject to forfeiture (the repurchase by the company) when that person leaves the company.
A detailed overview of the different types of equity compensations for employees at startups, including restricted shares awards, stock options and RSUs. Each type of equity award has different tax implications for employee shareholders at startups.