Accelerated Vesting Details

Accelerated vesting comes from the term ‘vesting’ that means part ownership of a company or venture. It is employed to attract and keep exceptional talent in the company by offering or vesting them a certain percentage of ownership if they meet specific requirements.

Vesting is a legal time for the right to a present or future payment, benefit, assets, and benefits. It is employed when an employee gains non-forfeitable rights over company stock provided by the employer. It is a strategy to ensure that a company gets the best out of the individuals they hire. Accelerated vesting is the company choosing to shorten the time when the employee will have access to the company stock in question.

Accelerated vesting is a retirement benefit where the offered company stocks are left to vest for a short period. It is most useful during acquisitions or mergers to motivate the most talented employees to remain at the establishment. It is also employed when there are existing vesting rights within the companies coming together.

Example of Accelerated Vesting

Jane Doe is a professional in a top tech company but decided to join a start-up because they specialize in her field. While negotiating her employment, the company offers her a ridiculously lower salary than what she is used to but provides other incentives with company stocks that will vest within four years.

Thanks to the efforts of Jane, the company becomes valuable and is sold after two years. The new management decided they didn’t need employees like Jane because they already have someone of their own to fill the position – they decide to fire her even though her share of the company stocks has not yet been vested.

If Jane has an accelerated vesting agreement with her former employers, she will have access to her share of the company stocks to sell for a profit since the company doesn’t want her anymore. If the company decides to keep her, the vesting period for her share of the company stocks continues undeterred. When employees are offered such incentives as company shares and stocks, it is essential to include an accelerated vesting clause for personal protection. This is advisable for high-value employees.

Significance of Accelerated Vesting

Companies often implement accelerated vesting for one of the following reasons;

  • To keep talented employees around to meet goals or progress.
  • Start-ups often employ the instrument to make themselves look more attractive to larger companies who have shown interest in the acquisition.
  • It is utilized to keep employees at a company through a merger or an IPO process.
  • It is also an incentive to keep talented employees around and reward loyal employees for their services over the years.

Out of the many options available, two triggers are most commonly used. They include;

  • Single Trigger Acceleration – This trigger is seen as employee-friendly. This type of trigger ensures that all the unvested stock shares of the employee will vest at the occurrence of a single event. If the employee has stock options instead, these become exercisable when that single, specified event occurs.
  • Double Trigger Acceleration – This is the most common form of accelerated vesting offered by companies because it helps keep their interests aligned with the employee. Just like its name implies, this vesting requires two events to occur before accelerated vesting can take place. The process begins with the sale of a company or a change of control, but it is not triggered until another significant event occurs.