It is common for clients to call and ask what will happen to their unvested shares of stock if their company merges or is acquired by another entity. It is critical to understand how unvested shares will be treated in an acquisition, especially if you are working for a start-up company.
As a founder or advisor, you may be able to negotiate a single trigger acceleration, which means your shares immediately vest when the company is acquired. Some key employees and senior executives can negotiate double trigger acceleration to protect their unvested shares, particularly if that employee is terminated after the acquisition. For many employee-level hires, however, no protection is given for unvested shares and the general terms of the company plan will govern their equity (often cancellation).
Single Trigger Acceleration
If you are in a position (founders, executives or advisors) to negotiate a single trigger acceleration (immediate vesting), you will want to focus on the need for your role in the company after the acquisition. The acquiring company will typically argue that they do not want to acquire your company if the key employees are not willing to stay after the deal closes. However, with a retention agreement negotiation, your importance to the continued success of the company has been acknowledged.
Double Trigger Acceleration
If you are a key employee and you could not negotiate a single trigger acceleration, you should obtain at least a double trigger acceleration: which, provides that your shares vest after the acquisition upon the occurrence of a second event (i.e. you are terminated without cause or some other trigger (event occurs) that you prefer. The two triggers for vesting are the acquisition and the termination without cause.
In negotiating this provision of your retention agreement, the employee must focus on the risk he or she is taking to remain with the company. This is particularly true if you can show that you have sacrificed compensation for the equity. Additionally, if a key employee will lose valuable unvested equity in an acquisition, then his or her incentive is not the same as the company’s goal. By allowing either a single trigger, or double trigger, acceleration, the employee’s incentive to assist the prompt completion of the acquisition is aligned with the company’s goal to do the same.
Negotiating your equity treatment in a retention agreement can be complicated. If you need assistance understanding your options or help negotiating the terms of a contract, contact Mailly Law today. We will increase your bargaining power and help ensure that you obtain the compensation and benefits you deserve. Contact our office today to schedule your consultation.