Nivi · April 25th, 2007
“We talked to a lot of different angel investors and venture capitalists, but no one really ‘got’ what we were doing — that is until we met Google.”
“It’s no real secret that Google wasn’t supporting dodgeball the way we expected. The whole experience was incredibly frustrating for us — especially as we couldn’t convince them that dodgeball was worth engineering resources, leaving us to watch as other startups got to innovate in the mobile + social space… It was a tough decision to walk away…”
Summary: Negotiate some acceleration if you sell the company ahead of schedule — you don’t want to stay at the acquirer for an unreasonable period of time. Also negotiate 100% acceleration if the acquirer terminates you and deprives you of the ability to vest your stock.
Your vesting should accelerate upon a change in control of the company, such as a sale of the business.
Negotiate both single and double trigger acceleration.
Your options for acceleration upon a change in control, from best to worst, include
- Single trigger acceleration which means 25% to 100% of your unvested stock vests immediately upon a change in control. Single trigger acceleration does not reduce the length of your vesting period. It only increases your vested shares (and decreases your unvested shares by the same amount).
- Double trigger acceleration which means 25% to 100% of your unvested stock vests immediately if you are fired by the acquirer (termination without cause) or you quit because the acquirer wants you to move to Afghanistan (resignation for good reason). The hack for acceleration upon termination already provides double trigger acceleration and provides sample definitions of termination without cause and resignation for good reason.
- Zero acceleration which is a little better than getting shot in the head by the Terminator:
The most common acceleration agreement these days combines 25% – 50% single trigger acceleration with 50% – 100% double trigger acceleration. The median of this range is probably 50% single trigger combined with 100% double trigger.
Justifying single trigger acceleration.
You can justify single trigger acceleration by arguing that,
“We didn’t start this company so we could work at BigCo X for two or three years. We’re entrepreneurs, not employees. We’re willing to work at BigCo, but not for that long.
If we sell the company after two years, that just means we did what we were supposed to do, but we did it faster than we were supposed to. The investors will be rewarded for an early sale by receiving their profits earlier than they expected. We shouldn’t be penalized for an early sale by having to work at BigCo for years to earn our unvested shares.
Single trigger acceleration reduces the effective time we have to work at BigCo and rewards us for creating profit for the investors ahead of schedule.”
Justifying double trigger acceleration.
You can justify 100% double trigger acceleration by arguing that,
“The aim of vesting is to make me stick around and create value — not to put me in a situation where I am deprived of the opportunity to vest because I am terminated for reasons beyond my control or I resign because the environment is intolerable.
So, if I am terminated with no cause by the acquirer, I should vest all my stock. Or if the conditions at the acquirer are intolerable and I resign for good reason, I should vest all my stock.”
The risk of termination at an acquirer is much greater than the risk of termination in a startup. Investors are generally investing in the future value of a startup — they’re investing in people. Acquirers are generally investing in the existing value in a startup — they’re investing in assets.
Acceleration agreements give you leverage upon a sale.
When you sell a company, the acquirer, founders, management, and investors will renegotiate the distribution of the chips on the table. It isn’t unusual to renegotiate existing agreements whenever one party has a lot of leverage over the others. To quote the fictional Al Swearengen,
“Bidding’s open always on everyone.”
Negotiating your acceleration agreement now gives you leverage in this upcoming multi-way negotiation.
If an acquirer doesn’t like your acceleration agreement, they can decrease the purchase price and use the savings to retain you with golden handcuffs. A lower purchase price means less money for your investors. This provides you with negative leverage against your investors — you can decrease your investor’s profit if you refuse to renegotiate your acceleration.
Or, the acquirer can increase the purchase price in return for reducing your acceleration. A higher purchase price means more money for your investors. This provides you with positive leverage against your investors — you can increase your investor’s profit if you agree to renegotiate your acceleration.
Visible contributors benefit the most from the renegotiation.
After this renegotiation, the CEO and key members of the management team often end up with better acceleration agreements than everybody else. That’s not a big surprise — the CEO is leading the renegotiation.
Founders who are perceived as major contributors by the board and acquirer may also benefit from the negotiation. If you’re the Director of Engineering, you’re probably invisible to the acquirer — if you’re the VP of Engineering and involved in the negotiations, you may do much better.
As always, the best defense against these shenanigans is to create a board that reflects the ownership of the company and to make a new board seat for a new CEO.
What are your experiences with vesting upon a change in control?
Submit your experiences and questions regarding vesting upon a sale in the comments. We’ll discuss the most interesting ones in a future article.
Appendix: Definition of ‘Change in Control’
A sale of the company is an example of a change in control. Your lawyers will help you define change in control. A definition that we have used in one term sheet follows.
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“Change in control” shall mean the occurrence of a sale of all or substantially all of the Company’s assets or a merger or consolidation of the Company with any other company where the stockholders of the Company do not own a majority of the outstanding stock of the surviving or resulting corporation; provided that a merger, the sole purpose of which is to reincorporate the Company, shall not be treated as a change in control.
Whatever you do, make sure that the trigger runs for a period of time BEFORE as well as AFTER change of control. You want to avoid any pre-emptive house cleaning of management before the deal is done.
I still get a good deal of moral outrage from investors when I try t o negotiate this provision into the deal. Their objections seem ot be a knee jerk reaction to anything that might cut into their ROI on a liquidty event. As if.