Single-Trigger vs. Double-Trigger Acceleration: What's the Difference?
Stock acceleration can be a critical piece of the equity puzzle for startup founders and key employees. We’re not exaggerating when we say that understanding stock acceleration and its triggers can protect you from a significant loss of equity in the event your company is sold or acquired. And acceleration provisions aren’t something you can trust to hammer out during merger and acquisitions (M&A) negotiations. Oftentimes, these provisions are baked into the original vesting terms of your equity award, which may specify in which event your stock vesting is subject to single-trigger acceleration or double-trigger acceleration.
But we are getting ahead of ourselves. There is some ground to lay before we dive into the discussion of single-trigger vs. double-trigger acceleration at the core of this guide. First, we’ll review the basics of vesting and vesting schedules as they typically apply to founders and key employees. This discussion will naturally lead us to a definition of stock acceleration, which describes an event in which stock that was otherwise subject to a vesting schedule becomes partially or fully vested if a triggering event occurs.
“Triggering” is the key word here, as a single-trigger or double-trigger acceleration is defined by how many events (one or two) must occur to, well, trigger stock acceleration. Stay with us, and we’ll break it all down.
- What is vesting?
- What is acceleration of vesting and why does it matter?
- What is single-trigger acceleration?
- What is double-trigger acceleration?
- Single-trigger acceleration vs. double-trigger acceleration
- Final thoughts: Take acceleration seriously
What is vesting?
Startup founders may have their own motivations for doing what they do, but most of them tend to share at least one goal. This goal, broadly speaking, is to do such a great job growing a company that it will be wildly successful and generate a lot of money for said company’s founder and key employees. One way to ensure that these early employees get a payout commensurate with the company’s success is via equity compensation, i.e. granting them stock options or shares of company stock as part of their compensation package.
Oftentimes, this stock is subject to a vesting period or vesting schedule, which is put in place to ensure that employees only receive full ownership of their equity after they’ve been with the company for a certain period of time or reached certain milestones.
The idea behind stock vesting is pretty simple: The employee is granted a specific amount of stock at the beginning of their employment, but they only gain the right to fully own that stock once they satisfy certain requirements. These “vesting requirements,” which can be time-based, performance-based, or a combination of both, are intended to serve as a proxy measurement of how much the employee has helped the business grow.
A typical vesting schedule unlocks full equity ownership after a period of four years with a one-year vesting cliff, meaning the employee starts to actually own a portion of their equity only after one year.
What is acceleration of vesting and why does it matter?
Acceleration of vesting occurs when equity granted to an employee is no longer subject to the original vesting schedule. This allows the employee to gain partial or full ownership of their shares on an accelerated schedule.
Acceleration typically only applies to founders and key employees, who oftentimes have acceleration provisions or an acceleration clause written into their equity grant terms. But in what case would acceleration actually happen? And who exactly does it benefit? To answer these questions, let’s turn to an example.
An example of stock acceleration
Ariana is the CMO of an early-stage startup. She has shares of stock that will vest over four years, and these shares make up a significant part of her compensation. Everything is going great, and business is growing in all the right ways.
Everything is going so great, in fact, that after a period of just two years on the job, Ariana’s company accepts an offer to be acquired by a much larger company. The acquiring company already has a CMO and doesn’t really have a need or place for her services, so they decide to terminate her employment following the acquisition.
This may or may not be a desirable outcome for Ariana (perhaps she doesn’t want to work for the new company, or perhaps she’s more interested in growing early-stage startups). But it’s important to note that she is not voluntarily deciding to leave; the company is deciding to terminate her position involuntarily.
This situation leads to a question about Ariana’s equity – namely, what happens to all of her unvested shares? It seems unjust that her good work has led to an outcome (i.e. the sale of the company) that will force her to give up the value of her unvested equity, all because the acquiring company already has a CMO of its own.
Fortunately for Ariana, this is not the case. Legal language in her original grant specifies that her vesting will accelerate if two distinct triggering events occur:
- Trigger 1: The company is sold, acquired, or otherwise undergoes a change in control.
- Trigger 2: Ariana’s employment is involuntarily terminated, within a period of 12 months following Trigger 1.
Since both of these triggers have occurred — the company was sold and her employment was terminated shortly after the sale — Ariana’s vesting accelerates and she is granted the full value of her equity at the time of her termination.
You may have noticed that two triggering events had to occur for Ariana’s vesting to accelerate. This is an example of double-trigger acceleration. Single-trigger acceleration, on the other hand, describes a situation in which only one triggering event must occur for vesting to accelerate.
What is a vesting trigger?
A vesting trigger is any event that must occur for stock vesting to accelerate. The two most common vesting triggers are change of control (i.e. the sale or acquisition of a company by an outside party) and the involuntary termination of the employee.
As we illustrated in the example above, vesting triggers generally exist to protect employees (especially startup founders and key employees) from the perils of being too successful. In many cases, language regarding these triggers is enshrined in the equity grant.
Should I negotiate acceleration provisions in my employment offer?
If you can, it’s a good idea to negotiate acceleration provisions or an acceleration clause into your equity grant before signing an employment contract. This is a forward-looking move to ensure that you don’t lose the value of your unvested equity if and/or when certain events happen.
It may be difficult to negotiate a stock vesting acceleration clause later, when you actually need it. That’s why founders and key employees should, as a general principle, try to ensure that any triggering events that may accelerate vesting are clearly spelled out in their equity grant.
Note that vesting acceleration is an entitlement most commonly reserved for founders, executives, and the other key employees; if you don’t fall into this group, it may not be available to you.
What is single-trigger acceleration?
Single-trigger vesting acceleration means that the employee (typically a founder or executive) is entitled to acceleration of vesting if one triggering event occurs.
There is no hard-and-fast rule that says what this triggering event must be. In many cases, it is the sale or acquisition of the company. But single-trigger acceleration can also be triggered by involuntary termination.
Single-trigger acceleration tends to favor the employee over the employer, which is maybe why it’s not all that common. Think about it: If a key employee benefits from automatic acceleration of vesting on an acquisition, they may no longer have a great incentive to stay with the company post-acquisition. And if they decide to leave, their departure could affect the ongoing success and quality of the business — likely factors that led the acquirer to purchase the company in the first place.
What is double-trigger acceleration?
So, there are some issues with single-trigger acceleration. Double-trigger vesting acceleration tips the scales over to terms that VCs and other investors tend to find more agreeable — while also still providing key protections to employees. The way it does this is simple: It adds a second trigger.
We already reviewed the two triggering events that are typically used for double-trigger acceleration as part of our example above. As a quick refresher, these triggering events include:
- The sale or acquisition of the company
- The involuntary termination of the employee, usually within a certain time period from the closing of the sale. The longer this period of time, the more generous the terms are to the employee.
Single-trigger acceleration vs. double-trigger acceleration
When considering the merits of single-trigger vs. double-trigger acceleration, it helps to know which side you stand on.
VCs and investors may shy away from investing in companies with single-trigger acceleration clauses amongst the founders or executives. Who can blame them, when an acquisition could potentially lead to retention issues with the company’s top-level talent and negatively impact equity dilution?
Conversely, there’s a lot to recommend about double-trigger acceleration, which seeks to protect the employee’s equity interests while also shielding the acquirer from some of the financial pain associated with single-trigger acceleration:
- The employee can continue to grow their equity ownership according to the original vesting schedule. They can rest assured knowing that it’s not necessarily in the acquiring company’s best interest to terminate them — and that even if they are terminated, this “triggering event” will cause their shares to vest.
- On the other hand, the acquirer benefits from the employee’s continued commitment and avoids a scenario in which they are forced to shell out a huge amount of equity upon the closing of the sale. There’s a certain flexibility here, too, as the acquirer/new employer could decide to terminate the employee if (and only if) it makes sense financially, given the impact of the employee’s vesting acceleration on the option pool for other shareholders.
Final thoughts: Take acceleration seriously
When considering an equity grant, it’s not just the amount of equity that matters. Oftentimes, vesting terms or restrictions can have a major impact on how much equity you’ll actually get in the event of a change in control or involuntary termination. So, assuming you’re in a position to do so, it pays to negotiate fair acceleration provisions upfront — and it can certainly save you a headache later.
If you want to learn more about equity and what to look out for as a founder, schedule a call with one of Pulley’s experts today.