When you found a startup, you need everyone on the team committed to making the company succeed. A common tactic to accomplish this is by offering your employees, advisors, board members and contractors stock options. The offer of company shares makes everyone united in the goal of helping the company grow, while the vesting period ensures that everyone offered shares is motivated to stick around during the difficult times. Startup vesting and acceleration clauses are ways to balance the best interests of personnel and the company and ensure that your startup succeeds.
If you are considering allocating stocks, even simply among founders, it is vital for you to contact a startup lawyer to help you protect your company’s best interest. Priori's on-demand marketplace can connect you with experienced startup lawyers who have experience with startup vesting and acceleration clauses.
Understanding the Reasoning Behind Startup Vesting
When stocks are given to founders, key employees, and even some investors as a means of compensation or bonus, they usually are subject to vesting—that is, they are not fully released to the person receiving the shares until the person has stayed with the company for a certain amount of time. Many founders wonder if vesting is really necessary, especially among themselves, but vesting is a vital mechanism that keeps all team members invested in making the company a success in the long term.
Graded Vesting vs. Cliff Vesting
There are two main ways that vesting provisions are written: graded vesting and cliff vesting. Under graded vesting schemes, a person accrues a proportional right to the shares. For example, an award of stock with a five-year graded vesting period would give you a right to 20% of the total share award each year. This portion of vested shares can be recalculated annually, but they can also be recalculated quarterly or even monthly, which would mean even employees not lasting a full year would have the right to some shares regardless.
Cliff vesting, however, is more common. Under cliff vesting schemes, all shares are subject to a cliff during which no shares vest until the cliff is met. This means that unless you last until the cliff is met with the company, you are entitled to no stock whatsoever. After the cliff, the rest of the shares vest monthly or on some other schedule over another period. For example, a common startup cliff vesting arrangement is a one-year cliff after which 25% of the stock vests, with the remainder vesting 1/36th each month thereafter. In this scenario, someone would be fully vested after four years total.
For key executives and even founders, however, vesting can become complex if the company is acquired before shares are fully vested. The inevitable changes that the new owner will want to make can cause friction and make the original members of the team want to leave. In some cases, the acquiring company can simply let founders and other employees go, leaving them without the ownership they expected. In order to prevent such consequences, acceleration clauses are often negotiated before or during the acquisition, which immediately vests a portion of unvested shares based on certain trigger events.
Single Trigger Acceleration
Single trigger acceleration provisions immediately vest 25%-100% of remaining unvested shares upon a change in control of the company, such as an acquisition. The exact percentage will depend on your negotiations. Keep in mind, however, that this trigger does not change the vesting period for any remaining unvested stock.
Double Trigger Acceleration
Double trigger accelerations provisions immediately vest 25%-100% of remaining unvested shares upon termination without cause or resignation with good reason (such as in reaction to a demotion or a material change in job expectations) after a change in control of the company. For double trigger acceleration, both events have to come to pass before the acceleration will occur. As with single trigger acceleration, the exact percentage of shares that will vest after the triggers will depend and the vesting period for any remaining unvested stock does not change.
Is single trigger or double trigger acceleration more common?
Both single trigger acceleration and double trigger acceleration are common, and they can be used together in different percentages to balance the needs of all parties involved. If you are not sure which acceleration terms are in your company’s—and your own—best interests, it can help to speak with a startup lawyer.