Accelerated Vesting of Stock Option

The pros and cons of accelerated vesting for employees on change of control

Accelerated vesting of stock options is a fairly unusual clause for founders to worry about. It is however, a very important term that I would highly encourage you spend enough time thinking about. Most founders end up doing accelerated vesting for themselves and maybe for the advisors but rarely for the employees.

What is accelerated vesting?

If you are giving 100 stock options to be vested over 4 years for employees, and there is an acquisition event in the 2nd year, then single trigger acceleration means all the remaining shares vest immediately. Your employees now have 100% of the shares they were going to get in 4 years at the close of the acquisition. A double trigger acceleration means if for any reason the acquirer fires your team or your team decides to quit because the acquirer is in Santa Monica and your team is in the Bangalore, they would still vest 100%.

Accelerated vesting is a good clause for employees to have by and large.

The acquirer, however, in many cases, but not all, wont like this, since most acquirers are buying your company, which is worth the software, technology and the services of the people who are in it.

With acceleration, the acquirer has to now budget new stock options to keep the employees for the period of time they think they need to get value from the acquisition.

Accelerated Vesting of Stock Option
Accelerated Vesting of Stock Option

The pros of accelerated vesting:

  1. Takes care of employees and gives them confidence that if there is a “change of control” – meaning if you raise money and the VC’s decide to fire the founders, get a new CEO, etc. then they will vest 100% immediately. Or if you get acquired, the employees will hit pay dirt immediately.
  2. Gives you a negotiating chip when potential acquirers want the team to ensure they keep you and the team around.

Cons of accelerated vesting:

  1. Potential acquirers dont like this, since they are not sure how many of the new members will accept new jobs in the acquiring company and they are buying the team and company, not just the software and technology
  2. It might artificially lower the acquisition price since the acquirer might negotiate the new employment contracts with your employees directly and try to pass the costs of the new contracts to your purchase price.

What’ my experience:

Accelerated vesting upon change of control is absolutely important for founders and critical for employees.

I wish I had done it at BuzzGain and lost close to $250K because of it. I would highly recommend you do it for founders, advisors and employees.

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