A single trigger acceleration occurs when one event triggers the acceleration of vesting, allowing an equity owner to receive the full or partial value of his or her stock. Typically, they’re related to the sale, merger or restructuring of a company.
Single trigger acceleration is unpopular with investors who generally want to position the company for acquisition. One of the first things that acquirers review as part of their due diligence is vesting acceleration rights. This is because they largely want to ensure continuity of the talent and operations that made the company prosperous in the first place. If a key employee has a vesting acceleration right upon the company’s sale, then the buyer is at risk of losing the talent that built a successful organization.
For this reason, single trigger acceleration of vesting that’s conditioned on an ownership change is unpopular. It means that if the new owners want to retain these employees, they’ll need to sweeten the pot to incentivize the original employees to continue with the new organization, driving up the cost of the transaction. On the other hand, vesting acceleration clauses can lead to a lower acquisition price to offset buyout costs. The result is diluted stock value for shareholders and investors.
A double acceleration clause requires two events to trigger vesting acceleration. One event is the sale or merger of the company, and the other is usually termination of the employee without cause. These are more attractive to potential buyers since they tend to promote mutual benefits to both the key employee with the acceleration rights, as well as the acquiring entity. Rather than triggering automatic acceleration upon the event of a company’s acquisition, another event is required in order to trigger vesting acceleration: the employee’s termination.
This is appealing to acquirers who often aim to retain certain key personnel more than others. For example, acquiring entities regularly want to replace the General Counsel of the old entity with their own GC, while preserving individuals in operations and second tier senior management positions. A double trigger acceleration clause empowers the new entity to fine-tune their selection by enabling them to terminate without cause those key employees they don’t need, while maintaining business continuity with core senior staff from the former company.
If you’d like assistance structuring your vesting acceleration clause by vetted startup attorneys, I invite you to take a look at LawTrades. I’m also happy to answer any questions you have, so please feel free to comment below.