Accelerated Vesting of Stock Options - Explained
What is Accelerated Vesting of Stock Options?
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Table of ContentsWhat is an Accelerated Vesting Clause?What is Single-Trigger Vesting?Double - Trigger VestingWhy Include an Acceleration Clause?
What is an Accelerated Vesting Clause?
Often companies use stock to compensate employees for their services. This allows the company to save cash, and it incentivizes the employee to work toward company success (as she is an owners). To make certain the employees stay with the company for a reasonable time and to prevent immediate sale of the granted stock, the company will generally make the stock restricted and subject to vesting. Restricted stock cannot be transferred or sold without the company’s consent. Vesting stock means that the shareholder does not immediately become owner of the granted stock. Rather, ownership will vest in her over a specified period of time. The typical time period for vesting is over four years, with the first lump sum of stock vesting at 12 months (known as a “cliff”).
Acceleration in this context means that the vesting schedule is disregarded and the shares immediately vest in the employee upon certain occurrences. Normally, vesting takes place when the company is sold or there is a change of control. A “change of control” generally refers to the sale of all or substantially all of the company’s assets, or a merger of the company with another company where the stockholders do not own a majority of the outstanding stock of the surviving company. Accelerated vesting provisions is generally broken into two categories:
What is Single-Trigger Vesting?
This means that, upon the occurrence of a specific condition - such as change of company control - a certain percentage of any unvested stock granted to the employee immediately vests. The percentage that vests is normally based on a formula that takes into consideration the time period and number of unvested shares. The period of the vesting schedule remains the same except for the immediate vesting of a certain percentage of shares. The remaining unvested percentage will continue to vest in accordance with the vesting schedule.
Double - Trigger Vesting
This acceleration clause general allows for acceleration (immediate vesting) if the employee is terminated by the purchasers of the company (without justification or cause) or the employee has good reason to resign based upon the demands or requirements of the acquirer. It is not uncommon for employees of a company being purchased to be discharged from employment to avoid duplication of work responsibilities. If the employee is not discharged upon acquisition, it is common for the acquirer to significantly change the employee’s terms or conditions of employment. As such, the double-trigger vesting clause protects the employee for unfair treatment in the event the company is acquired.
Why Include an Acceleration Clause?
Including an acceleration clause in an employment contract or a stock grant agreement provides leverage to the employee in the event of change of control in the company. The employee can use these rights to negotiate repurchase of her vested shares or alternative job functions. In any event, negotiating an acceleration clause into an employment agreement or stock grant should be a primary concern for an employee.