Employee Retention Strategies: Leveraging Single-Trigger and Double-Trigger Vesting

Recently, companies have introduced different ways to compensate employees beyond regular salaries. This includes giving employees a stake in the company through stock options and awards. These methods encourage employees to do their best work in exchange for future benefits, but there’s usually a waiting period, known as vesting before these benefits fully kick in.

With stock-based remuneration, employees in a firm’s initial stages are given the opportunity to own shares of stock in addition to their regular salary. Depending on the firm’s growth stage, the percentage of shares designated for stock options can range from 5% to 15% and occasionally up to 20%.

When an employee receives stock options from a company, it doesn’t immediately transfer ownership of the shares. Instead, the options typically come with a vesting schedule, a predetermined timeline over which the employee gains the right to exercise (buy) the granted stock options.

What is Single Trigger and Double Trigger Vesting?

Vesting is when employees gain ownership of their stock options or other benefits over time. It aligns incentives, promoting long-term commitment and performance within a company. Vesting can be time-based, performance-based, or a combination of both. Below are the types of vesting that happen when a company is acquired.

Single Trigger Vesting

Single-trigger employee stock options vesting means that if there is a major change in the company, like a change in control or acquisition, employees get the right to cash in all their stock options immediately, even if they haven’t worked for the company for the full-time originally required. If the company gets sold, it’s like a shortcut to cashing in your stock options.

Let’s assume the company granted the employee 1,000 stock options, and at the time of the company’s acquisition, the employee still had 600 unvested options. With a single-trigger provision, all 600 unvested options would immediately become exercisable, and the employee could exercise them to acquire company shares.

In regular vesting, stock options unlock gradually over the years. With single-trigger vesting, like in a company sale, all remaining options become immediately exercisable — a special perk tied to significant events. This benefits employees by swiftly converting stock options into actual stock or cash during uncertain times, offering financial security during company changes.

Double Trigger Vesting

Double-trigger employee stock vesting involves specific conditions that an employee must meet for complete vesting of the options or restricted stock units (RSUs). In contrast to single-trigger vesting, which usually requires only one event for vesting, a double-trigger arrangement mandates the fulfillment of two distinct triggers.

The two common triggers in a double-trigger vesting arrangement are:

Change of Control (CoC): A substantial alteration in the ownership or control of the company triggers when events such as a merger, acquisition, or sale of the company occur.

Termination of Employment: The second trigger involves the termination of the employee’s employment. This could be termination without cause, resignation for good reason, or termination due to certain circumstances specified in the employment agreement.

Both triggers must occur for the stock options or RSUs to vest fully. If only one trigger happens, the stock may not fully vest, protecting the company and aligning the employee’s interests with the business’s long-term success.

Let’s assume an employee, Adam, has been granted stock options with a double-trigger vesting provision. Another company acquires the company he works for, constituting a change of control. However, The acquiring company retains Adam in his employment and does not terminate him.

In this case, because only one trigger (Change of Control) has occurred, the stock options may not fully vest. Both triggers must happen for the options to fully vest (Change of Control and Termination of Employment). If, at a later point, Adam’s employment is terminated (for a qualifying reason), then the stock options would fully vest.

In the event of a change in control, it ensures that employees receive rewards for their contributions, and it also prevents employees from obtaining the full benefit unless the company terminates their employment under specific circumstances.

How does Single and Double Trigger vesting help the company?

Imagine you’re running a company. Sometimes, major changes like mergers or acquisitions happen in the business. To ensure your key employees stay on board and remain focused, you introduce “vesting triggers.” These triggers serve as a way for the company to encourage loyalty and dedication from its employees during times of transition. Let’s discuss why companies adopt these vesting triggers and how they benefit the business and valuable team members.

Empowering employees through strategic vesting triggers is not just an investment in their loyalty; it’s a commitment to shared success, ensuring that when the company succeeds through change, so do those who contribute to its journey.

Single Trigger Vesting

• Single trigger vesting ensures that a portion of an employee’s equity or benefits becomes vested upon a change of control, providing a retention incentive during uncertain times.
• Potential hires may find a company more attractive if it offers the security of vesting in the event of a change of control, mitigating risks associated with transitioning to a new organization.
• Alignment of interests encourages employees to focus on achieving corporate goals and maximizing company value, as it directly impacts their financial gain through accelerated vesting.
• Single trigger vesting helps the acquiring company retain key talent from the target company by safeguarding employees’ vested benefits.
• Promotes employee loyalty during times of uncertainty and transition, as employees feel secure knowing their vested benefits are protected even if ownership or leadership changes.

Double Trigger Vesting

• It requires two triggers (e.g., change of control and termination), ensuring a longer-term commitment from employees to stay with the company after the triggering event.
• Mitigates risks for the company by aligning employee incentives with long-term stability, reducing the likelihood of a mass exit of talent post-change of control.
• Encourages employees to participate in strategic decision-making during a change of control, as their vested benefits depend on the success of the company post-acquisition.
• Ensures employees focus on value creation post-acquisition, tying their financial gain to the change of control event and the company’s long-term success.
• This is particularly beneficial in dynamic industries with frequent change of control events, ensuring employees remain committed and do not continually seek new opportunities with every change in ownership.

Establishing Vesting Schedules through Eqvista

Vesting is the basis of employee benefits, ensuring employees stick around for a while. Employees getting company stocks over time shows they’re part of the team, making the company more successful.

The more they help the company grow, the more rewards they get from those stocks. As it involves a lot of work, Eqvista helps companies, investors, and other stakeholders to track, manage and make decisions about their stock options. Our captable supports both time-based and performance-based vesting. To know more, contact us Today!