Board of Directors and Advisors

Accelerating vesting on a sale or termination

You may want the vesting of your shares to accelerate if you are fired or the company is sold. Is that a good idea? Will your investors agree to this?

Acceleration of vesting if you are fired (terminated without cause) sounds like a good idea. Your investors won’t generally see it that way, however. First of all, proving you have “cause” is not easy to do. Second, investors don’t want to terminate you—you’re a primary reason they made the investment in the first place—and they want and need you to build the company. In the end though, they have their money (and their own investors) they need to think about, and they will make a change if they have to. That’s a difficult time for the company and they will need your unvested shares to recruit and incentivize your replacement. So, investors don’t generally allow for your shares to accelerate in these circumstances.  

For similar reasons, acquirers of companies don’t want the talent they are acquiring to have a windfall on closing due to accelerated vesting. They may need those vesting incentives to continue or find other ways to incentivize the team, which results in a higher acquisition and compensation costs to the acquirer (and likely a corresponding reduced purchase price for your company and its investors). Moreover, the people who are likely to benefit most from accelerated vesting on a sale are the employees who joined the company closest to the time of the acquisition. Compare those employees to the founders and earliest employees who are probably fully, or close to fully, vested by the time the company is sold. So pushing for accelerated vesting on founder shares may not really help you that much (and may make it more difficult for you to recruit employees if you aren’t willing to give them the same terms).

Sometimes a small percentage of the vesting accelerates upon a sale (e.g., 25% of the shares). More frequently, we see full acceleration if the person’s employment is terminated without cause by the acquirer after a sale of the company (if the acquirer decides to terminate your employment then they can’t be so concerned about incentivizing you can they?). This is generally referred to as a “double trigger” because it requires both (1) the sale of the company and (2) a termination without cause.   

Note that it is more common for acceleration upon a sale to apply for equity held by members of the board of directors and advisory boards because  it is unusual for these people to play any role in the company or acquirer following the acquisition.