What Is Accelerated Vesting?
Accelerated vesting allows employees to gain access to their stock options or restricted stock sooner than the original vesting schedule. This means they can benefit financially faster in either of the following ways:
- By owning the stock outright OR
- Exercising options at a favourable price.
It’s a strategy companies use to reward key employees, retain talent, or prepare for major events like an acquisition or IPO.
How Does It Work?
Normally, stock options vest over a period (e.g., 4 years with a 1-year cliff). Accelerated vesting shortens this schedule, giving full or partial access earlier than planned.
This can take two main forms:
- Single-Trigger Acceleration: Options vest immediately upon a major event, like the sale of the company.
- Double-Trigger Acceleration: Two events should occur – typically a company sale and the employee being terminated or leaving within a set time afterward.
Companies may also choose to expense the cost of the accelerated stock options earlier for accounting purposes.
When Is It Used?
Companies implement accelerated vesting in these scenarios:
- Attract or retain top talent by offering better incentives.
- Reward high-performing employees ahead of schedule.
- Encourage loyalty during transitions like:
- Acquisition: Fully vesting employees to keep them through the sale.
- IPO: Motivating employees to stay until the company goes public.
- Make the company more attractive to buyers, by ensuring employee stock is already vested.
Example
Let’s say Namita joins a startup and is granted 5,000 stock options with a 3-year vesting schedule and a strike price of Rs. 200.
After 2 years, the company is acquired. Under a single-trigger acceleration clause, her options vest immediately.
At the time of acquisition, the market price is Rs. 500. Namita exercises all 5,000 options at Rs. 200, costing her Rs. 10,00,000. She sells them at Rs. 500, earning Rs. 25,00,000, and walks away with a Rs. 15,00,000 profit.
Downsides and Risks of Accelerated Vesting
While accelerated vesting can be motivating, it comes with certain risks founders and HR teams should consider:
Accounting Complexity: It can increase your compensation expense and complicate reporting, especially during audits or M&A due diligence.
What you should know
- Accounting Complexity: It can increase your compensation expense and complicate reporting, especially during audits or M&A due diligence.
- Retention Risk: Once employees are fully vested, they may be more likely to leave, especially post-liquidity events.
- Perception of Inequity: If only a few team members receive accelerated vesting, others may feel undervalued.
- Dilution Impact: Early vesting can lead to a sudden increase in outstanding shares, affecting the cap table and shareholder equity.
Best Practices for Founders and HR Teams
- Use selectively: Reserve accelerated vesting for critical hires or in high-stakes situations like acquisitions.
- Communicate clearly: Be transparent about the terms, especially around triggers and timelines.
- Combine with retention tools: Pair accelerated vesting with retention bonuses or new grants to encourage longer-term commitment.
- Align with business strategy: Ensure vesting clauses support your exit, fundraising, or talent goals and should not work against them.
Final Thought
Accelerated vesting is a powerful tool for incentivising and retaining talent, especially during pivotal business events. However, if proper measures are not put in place, it may also lead to employees leaving after receiving the benefits. While it offers early financial rewards, it also comes with tax implications for both employers and employees.