In your exploration of the startup world and how startups compensate founders and employees, you may have heard the term trigger being thrown around. In terms of vesting, a trigger is any kind of event that causes an acceleration of the pre-set vesting schedule.
Acquisition, or any change of ownership, of a startup by another company is the event that generally triggers these accelerations.
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:
Single Trigger Acceleration
A single trigger acceleration typically causes the full vesting of 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.
Double Trigger Acceleration
Double trigger accelerations have replaced single triggers in the terms of most founder and employee agreements today. They 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 acquisition.
Double trigger accelerations are best placed to align the interests of the founder/employee and the acquiring interest. They essentially 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. In the case that the new management deems it financially or otherwise advantageous to terminate them or otherwise change the terms of their employment after acquisition, they 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 taken a section 83b 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.