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.
Double Trigger Acceleration and Other Change of Control Terms for Startup Stock, Options and RSUs
What does double trigger acceleration mean? It protects unvested shares from cancellation in a change of control by immediately accelerating those shares if the individual is terminated as part of the change of control. Founders, executives and key hires, including employee-level hires at early stage startups, negotiate for Double Trigger Acceleration in their equity grant documents at the offer letter stage.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Originally published June 5, 2018. Updated July 27, 2023.
Change of Control Terms for Startup Stock, Options and RSUs
Startup stock, options and RSUs vest over time. Since they vest over time, some may not be vested when the company has a change of control (aka merger or acquisition). What happens to the unvested shares at change of control? It depends on the fine print in your equity documents.
Founders, executives and key hires, including employee-level hires at early stage startups, often negotiate for Double Trigger Acceleration to protect their unvested shares. Advisors and some founders and rare executives may negotiate for Single Trigger Acceleration so that their shares immediately vest at acquisition. However, these protections are not often negotiable for employee-level hires except at very early stage companies. Their equity will be governed by the general terms of the Plan, which will likely be either an unfavorable Cancellation Plan.
Single Trigger Acceleration
The ideal change of control acceleration term is Single Trigger Acceleration - so that 100% of unvested shares vest immediately upon change of control. Investors and companies often argue against this term because the company may be an unappealing acquisition target if its key talent will not be incentivized to stay after closing. This is especially true for technical talent at a technology company.
Advisors, some founders and rare executives may negotiate for Single Trigger Acceleration if they can make the case that their role will not be needed after change of control. For example, advisors naturally negotiate for Single Trigger Acceleration because their primary role is to advise a company at the startup stage. They would not be necessary after an acquisition as they’ve fulfilled their purpose by that time. Founders and executives sometimes argue for Single Trigger Acceleration based on aligning incentives. For example, I’ve worked with a CFO who negotiated for 50% Single Trigger Acceleration because he was hired with the express purpose of improving the company’s financial position to achieve an acquisition. Those with similar arguments may even negotiate for Single Trigger Acceleration to apply at IPO, which would be a very unusual term but a logical incentive for certain hires.
Double Trigger Acceleration
The next best term is Double Trigger Acceleration, in which unvested equity immediately vests if both of two triggers are met. First, the company closes a change of control. Second, the individual’s service is terminated for certain reasons (most often a terminated by the company without Cause or a voluntary resignation by the individual for Good Reason).
Founders, executives and key hires, including employee-level hires at early stage startups, negotiate for Double Trigger Acceleration in their equity grant documents at the offer letter stage.
The key argument for Double Trigger Acceleration is based on risk. If an individual at any level of the organization is taking a significant risk to join the company, such as sacrificing significant cash or other compensation elsewhere to join, they advocate for Double Trigger Acceleration to protect their upside in the event that the equity becomes valuable. A grant of 1% with Double Trigger Acceleration is more valuable because of that protection of the upside. A second key argument for this term is based on “aligning incentives.” If individuals on the team could lose valuable unvested equity by achieving a prompt acquisition, their incentives would not be aligned with the company’s goals of closing that deal. Double Trigger Acceleration rights bring the individuals' incentives in alignment with the company's goals.
This Double Trigger Acceleration protection is negotiated at the offer letter stage and included in the final equity grant documents. The key negotiable terms in this clause are:
Full acceleration so that a qualifying termination at any time after acquisition 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 a sale of substantially all the company’s assets;
Immediate vesting at closing of the change of control if unvested shares would otherwise be cancelled without payment under a Cancellation Plan term. 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.
Continuation Plan
If the startup’s Equity Incentive Plan includes a continuation term, the value of the unvested shares continue to vest after change of control so long as the individual stays in service after the closing. We’ll call this style of plan a Continuation Plan. The unvested shares are likely to be converted into another form, such as RSUs in the acquiring company or cash deal consideration. But the value is protected so that the deal value per share paid to vested shares at closing will be paid to these unvested shares on each subsequent vesting date. If the individual is terminated or resigns for any reason, they would not be paid out. If the deal does not provide for such continuation or substitution, unvested equity will be accelerated so that it becomes 100% vested and paid at closing.
If an employee's total number of shares was worth $200,000 at the acquisition price, and only 50% had vested at the acquisition, the employee would be paid $100,000 at closing. But the unvested shares would be replaced with a substitution or continuation award in exchange for the $100,000 in unvested value. That might be in the form of cash to vest over time, continuing awards in the original company, or new equity in the acquiring company's equity. Whatever the form, it would continue to vest over the remaining portion of the original vesting schedule.
Without the Double or Single Trigger Acceleration protections described below, the individual could be terminated for any reason, at any time, and would lose the unvested shares. However, those who stay at the acquiring company under a Continuation Plan will continue to earn the deal consideration for their unvested shares. (But beware. Those with unvested equity under a Continuation Plan may also be asked to sign new employment agreements forfeiting these rights as part of the acquisition, since the company’s leverage of termination is significant).
Cancellation Plan
Most startup Equity Incentive Plans allow the company to cancel unvested shares without payment in an acquisition. We’ll call this type of plan a Cancellation Plan. Under a Cancellation Plan, unvested equity can be cancelled and replaced with $0, even if the unvested shares had significant value at the time of the acquisition. For example, if an employee's total number of shares was worth $200,000 at the acquisition price, and only 50% had vested at the acquisition, the employee would be paid $100,000 at closing. The unvested value of $100,000 could be cancelled without payment even if the employee stayed on as an employee after the acquisition. In another example, if the employee was within the first year of service and had a one-year cliff vesting schedule, 100% of the grant could be cancelled without payment even if it was immensely valuable based on the deal price/share.
The distinction between a Cancellation Plan and the more protective Continuation Plan is not usually a negotiable term. The exception to this would be at a startup with employee-friendly founders and executives who are willing to advocate for changes to their Plan with the board and stockholders. When startup candidates encounter this term in their offer negotiation document review, their best course of action is likely to be to negotiate for Single Trigger Acceleration or Double Trigger Acceleration for their individual grants.
Negotiating Change of Control Terms
The availability of Single Trigger Protection or Double Trigger Protection and/or the distinction between a Cancellation Plan and a Continuation Plan is a factor in assessing the risk of joining a startup. If the fine print protects 100% of the unvested shares, the shares have a higher potential upside for the employee or executive. Without these protections, it may make sense to negotiate for a higher cash package or a higher number of shares to balance risk. Check out more on my blog about market data for startup equity offers and other key terms that affect the risk of startup equity including clawbacks and tax planning for stock options.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.