Startup Double Trigger Acceleration Clause Fine Print Details
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Working for a startup? Startup founders, executives and key hires often negotiate for Double Trigger Acceleration. This is the smart move to protect unvested shares from forfeiture at Change of Control. Not all Double Trigger Acceleration Clauses are created equal, though. The devil is in the details. Photo by Felix Mittermeier.
Double Trigger Acceleration Clauses
Startup founders, executives and key hires often negotiate for Double Trigger Acceleration to protect their unvested shares in the event of a change of control or acquisition. This is the smart move, as otherwise the value of the unvested shares can be lost in the event of a successful acquisition. For example, an executive with a 1% equity interest could end up with $0 if the company is acquired within the first year of service and the grant did not include a Double Trigger Acceleration clause.
Not all Double Trigger Acceleration Clauses are created equal, though. That same executive with a half-hearted Double Trigger Acceleration Clause could end up with $0 as well. The devil is in the details.
Ideal Double Trigger Acceleration Clause
The ideal Double Trigger Acceleration Clause would include the following:
Full acceleration so that a qualifying termination at any time after change of control accelerates 100% of unvested shares;
Application to a qualifying termination in anticipation of, or for a certain protective period of time prior to, change of control;
Application to terminated by the company for Cause (narrowly defined, not to include arguable performance terms);
Application to a resignation by the individual for Good Reason (defined broadly to include a change in cash compensation, a reduction in duties or reporting structure, a geographic change, and anything else that would amount to constructive termination for the individual);
A broad definition of change of control including both (i) a transfer of voting control and (ii) a sale or lease of substantially all the company’s assets; and
Immediate vesting at closing of the change of control if unvested shares would otherwise be cancelled without payment under a Cancellation Plan term.
Weirdness in Double Trigger Acceleration Clauses
Recently, I’ve seen three weird patterns in the fine print of Double Trigger Acceleration Clauses in offer letters for startup hires.
Absurdly Narrow Definition of Change of Control
First, I’ve seen definitions of Change of Control that are so narrow that they would very rarely apply. For example, “an acquisition of 100% of the company or a complete dissolution of the company.”
This would not include some of the common deal structures that are used in startup M&A deals and that would be included in the standard “change in control” definitions used as part of Double Trigger Acceleration Clauses such as the definition Treas. Reg. section 1.409A-3(i)(5):
(5) Change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation—(i) In general. Pursuant to section 409A(a)(2)(A)(v), a plan may permit a payment upon the occurrence of a change in the ownership of the corporation (as defined in paragraph (i)(5)(v) of this section), a change in effective control of the corporation (as defined in paragraph (i)(5)(vi) of this section), or a change in the ownership of a substantial portion of the assets of the corporation (as defined in paragraph (i)(5)(vii) of this section) (collectively referred to as a change in control event). …
If the first trigger of the double trigger acceleration clause is so narrowly drafted as to be impractical to achieve, the clause itself would not effectively protect unvested shares. In that case, in evaluating such a startup equity offer, a hire can expect the potential upside only on the shares that will vest prior to an acquisition. That changes the cost/benefit analysis of a startup equity offer.
This can be addressed by revising the definition of Change of Control that applies to the Double Trigger Acceleration Clause. This would be negotiated in the startup hire’s offer letter and then flow through to the final grant documents / Carta vesting schedule.
Cancellation of Unvested Shares at Closing
Second, I’ve seen Double Trigger Acceleration Clauses that leave room for the company to cancel unvested shares - without payment or substitution - at a closing of a Change of Control. If there are no shares left after closing, and before the second trigger would be met through a termination of employment, there are no shares left to accelerate at such second trigger.
More on this here from Cooley:
Often overlooked, however, is that in order for double-trigger acceleration to be meaningful, the option grant or equity award must actually be assumed or continued by the acquiror in the transaction. This will not always be the case in a transaction – aquirors often have their own plans and ideas for incentivizing their employees. If an unvested option or equity award terminates in connection with a transaction, then technically, there will be no unvested options or awards to accelerate if the second trigger (i.e., the qualifying termination) occurs after the transaction.
This can be addressed by either:
Including in the double trigger acceleration clause immediate acceleration of unvested shares at closing if those shares would otherwise be cancelled without payment or substitution (best solution); or
Including in the definition of Good Reason (if applicable) such a cancellation of unvested shares at closing (not as good, but okay).
This would be negotiated in the startup hire’s Offer Letter and then flow through to the final grant documents / Carta vesting schedule.
Carta Does Not Match Offer Letter
Finally, I’ve recently seen a few Carta grants that do not include the Double Trigger Acceleration Clause language negotiated in the Offer Letter. Since the Carta grants include an integration clause invalidating any previously-negotiated terms not included therein, the absence of the Offer Letter’s double trigger language in the Carta vesting schedule could be read as forfeiting those rights.
Negotiating a Double Trigger Acceleration Clause
Like all startup equity offer negotiation points, evaluating and negotiating a robust and useful Double Trigger Acceleration Clause starts with the startup hire learning and understanding the fundamentals of startup stock. If you’ve read and grasped this post, you’re well on your way!
The time to include these terms is at hire, as the decision-makers at the time of an acquisition are not incentivized to (and could be prohibited by their fiduciary duties from) solving these problems for executives once the deal is on the table.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
VIDEO: Founder Restricted Stock Purchase Agreements
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Are you a founder with a restricted stock purchase agreement (RSPA)? Protect your equity stake with change of control vesting acceleration, Section 83(b) election and fine print details.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.