Acceleration can be a significant factor in attracting and retaining top talent at startups. This is especially true for those that are growing rapidly and facing increased competition for skilled workers. But what exactly is acceleration and how does it impact founders and employees? This article will answer those questions and more.
It’s important to keep in mind that every situation is unique, so it’s best to seek advice from a competent startup lawyer to understand what’s best for you or your startup. If you need help finding a lawyer, you can contact us here.
An acceleration clause accelerates a vesting schedule under certain circumstances. It is often included in the stock grants or stock option grants of startup employees and founders. It allows them to receive a larger portion of their equity in the event of an acquisition. The clause is designed to protect employees and founders from losing out on potential gains if they are let go after an acquisition. It also serves as an incentive for these individuals to stay with the company through its growth stages.
Typically, acceleration occurs on either a single trigger or double trigger basis.
The Difference Between Acceleration and Vesting
To fully understand acceleration, it’s important to first grasp the concept of vesting. While acceleration and vesting both relate to equity compensation, they serve different purposes.
Vesting is the process of earning equity over time, typically through a four-year schedule with a one-year cliff. This means that an employee must work for at least one year before any of their equity vests. After that, it will continue to vest in monthly or quarterly installments.
Acceleration, on the other hand, aims to protect employees and founders in the event of an acquisition. It enables them to receive their equity faster than they would under the standard vesting schedule.
In essence, vesting concerns earning equity over time based on continued employment, while acceleration concerns protecting against potential losses due to external factors like company acquisitions. Both are vital components of equity compensation packages for startup employees and founders.
Types of Acceleration: Single Trigger and Double Trigger
What is the difference between single trigger and double trigger acceleration?
- Single trigger acceleration Any unvested shares become fully vested upon the occurrence of a single event or trigger—an acquisition.
- Double trigger acceleration requires two separate events or triggers to occur before vesting is accelerated. The first event is the acquisition of the company, and the second event is a termination of the employee without cause.
Single trigger acceleration is favorable to the employees, but it is not common. Occasionally, a founder with a strong track record may negotiate for this type of acceleration, but it is rare for other employees. Acquirers value the skills and knowledge of startup leaders, and single-trigger acceleration could incentivize these leaders to leave the company after acquisition, which would reduce the company’s value.
Double-trigger acceleration has become the standard in startup equity because it protects both the employees and the acquirers. It ensures that employees are compensated fairly if they are terminated without cause during post-acquisition integration, while also incentivizing them to remain committed to adding value post-acquisition. At the same time, it aligns the interests of the acquirers and employees by ensuring that the latter continue to contribute to the company’s success even after the acquisition.
Why Venture Capitalists Prefer Double Trigger Acceleration
Venture capitalists (VCs) typically avoid investing in startups with single-trigger acceleration clauses among founders or employees. If it’s likely that a founder or key employee will leave the company after an acquisition, then the acquirer would likely pay less for the company. So, single trigger acceleration lowers the potential value of the company and therefore lowers the VCs return on investment. It’s for this reason that most investors require double-trigger acceleration as a condition to close a round of funding.
VCs prefer double-trigger acceleration because it reduces investment risk. By ensuring that key employees are incentivized to stay after an acquisition, investors can have more confidence in the startup’s success. In addition, double trigger acceleration aligns employee incentives with those of the company, leading to better overall performance. Consequently, startups incorporating double-trigger acceleration in their equity plans are more likely to receive investment from venture capitalists.
Double-trigger acceleration is not only beneficial to employees, but also serves as a valuable tool for startups seeking funding and enhancing their overall valuation.