Double Trigger Agreement
Dual-trigger acceleration has become very popular among early-stage companies and aims to align the interests of employees, investors and potential acquirers by (i) creating a safety net for key employees, some of which can be removed during consolidation during post-completion onboarding – CFOs and CMs are particularly vulnerable, (ii) dilution is reduced by automatic acceleration, and (iii) to allay the buyer`s concerns by maintaining the requirement for continuous services for the company in order to be invested. A single-trigger acceleration typically causes the full or accelerated acquisition of a founder`s or employee`s startup equity at the time of the event, regardless of the acquisition cliff. If you already have all your equity, why stay? Currently, these are losing popularity among most startups due to the difficulties they can create with employee retention. In most cases, it`s up to your buyer to decide. Some VCs won`t even consider a deal with a single trigger acceleration, while others may not care, especially if the terms have been in place since the company was founded. As a result, many of us look at employment contracts and often contain direct references to things like “change of control.” Do not skip these clauses too quickly, because you may find, as I have done in two recent cases, that the purchase of an employer exercises all the options or other emergency agreements and entitles you to an immediate payment of some form of deferred remuneration. Also note that some benefits such as pensions, ineligible pension plans and other forms of benefits may become “oversized” due to employment experience. The pension, which was $3,000 a month, could magically turn into $6,000 without the employee`s spouse just being on the payroll when the magic event happens. Even though these blessed events occur after separation, they usually occur under the terms of agreements or rewards made before separation. These are improvements that are not due to work or contributions after separation, but simply “because” the employer has been targeted for a buy-back. On the employee side, the double trigger acceleration serves as financial compensation, and two scenarios can occur: you may have acquired shares, and therefore one of the three things is likely, or you may have acquired shares. In the event that the new management deems it financially or otherwise advantageous to dismiss the founder or otherwise change the founder`s terms of employment after the acquisition, the founder`s shares will be acquired.
In some cases, the threat of the double trigger can be used as leverage to support a hostile situation. Since option grants to start-up employees have become a ubiquitous way to align employee and company incentives and reward employees in selling the business, startups should consider what happens to the options acquired, especially those held by key employees when the company sells. While acquiring a single trigger solves this problem, it is a pretty brutal instrument that can scare off potential buyers and investors. Dual-trigger acceleration has become increasingly popular among emerging companies as it offers a nuanced approach to providing equity while balancing the diverse interests of employees, investors and potential acquirers. However, to technically keep up with the dual-trigger acceleration, these underlying options must be taken over by a buyer, which is not always the case. Acceleration with a single trigger remains relatively rarer, and investors are often more likely to resist such provisions. Most contracts contain clauses that specify the period of the second triggering event in relation to the acquisition. A particularly generous term would cover the period of 3 months before and one year after the qualifying event. Since these events affect the amount of equity acquired available over a period of time, there may be additional tax obligations associated with them – even if you made an election under section 83b, you may have heard people talk about “single-trigger” or “double-trigger” acceleration.
What are they talking about? 2. The definition of “cause” is extremely critical in this context. These definitions can be very different. It`s also worth noting that many dual-trigger agreements include an alternative “second trigger,” commonly referred to as resignation for “good reason.” Such a provision would allow the shareholder, in certain circumstances, to benefit from the second acceleration of the trigger in the event of voluntary resignation, without being terminated by the company. Duplicate triggers consist of two different triggers: the first is the change of ownership and the second can be a set of conditions. Dual-trigger acceleration refers to acceleration based on the occurrence of two different events. In this case, each event is a “trigger”, and when both events occur, it represents a “double trigger”. A single trigger is any type of event that causes the predefined acquisition schedule to accelerate.
The acquisition or change of control of a startup by another company is the event that usually triggers these accelerations. However, it is often forgotten that for a significant acceleration with a double trigger, the granting of the option or the allocation of shares must actually be taken over or continued by the acquirer in the transaction. This won`t always be the case with a transaction – acquirers often have their own plans and ideas to entice them to their employees. If an option or classification acquired as part of a transaction terminates, there are technically no acquired options or rewards that can be accelerated if the second trigger (i.e., eligible termination) occurs after the transaction. Many venture-backed companies are acquired before the end of the four-year lock-up period. This raises the question of what should happen with respect to the common shares acquired in the event of an acquisition.1 A common approach is to provide that the acquired shares become fully acquired or “accelerated” after the acquisition if the shareholder is terminated by the acquiring company within a certain period, often one year, without “reason”2. This approach is commonly referred to as “double trigger” acceleration in an acquisition. It is so called because two events must occur before the employee shareholder is treated as the direct owner, without the risk of decay – first, the company must be acquired and, second, the employee must be dismissed.3 The one we have observed in recent years and which should be evaluated in a divorce environment is an employment contract, which contains “special provisions on changes of control”. Many large companies have various forms of stock agreements and pseudo-shares such as stock options, restricted shares, performance shares, and phantom share allocations.
The goal of these plans is to retain executives and encourage them to increase profits and stock prices in the hope that if they stay with the employer, they will participate in price increases. Most of these plans have gradually completed the exercise of incentive equity over three years. In order to repel hostile investors seeking a takeover, the employer writes in the agreement that in the event of a change of control over the company, all vested benefits are automatically vested and must be paid to the employee. Thus, when a buyout target is “acquired”, the acquiring company must pay not only what is promised into the employees` capital, but also the acquired portion. .