Accelerated vesting allows an employee to quicken the schedule by which he or she gains access to restricted company stock or stock options issued as an incentive. The rate typically is faster than the initial or standard vesting schedule. Therefore, the employee receives the monetary benefit from the stock or options much sooner.
If a company decides to undertake accelerated vesting, then it may expense the costs associated with the stock options sooner.
Breaking Down Accelerated Vesting
Employees stock or stock option plans provide incentives for employees to perform at a higher level and remain with the company longer. These rewards vest over time, meaning the amount actually available for the employee to withdraw increases on a set schedule.
For highly valued employees, companies may choose to accelerate the normal vesting schedule, which creates a higher present value for the employees. The benefit to the employees creates potential issues for the company, including the risk that the employee will take the money and leave the company shortly after that.
Changes in vesting have tax consequences for both the company and the employee.
Reasons to Implement Accelerated Vesting
Aside from simply offering better compensation to highly valued employees, a company, especially a young company or startup, might use accelerated vesting to make itself more attractive to an acquiring company. For example, a young company goes public, but the majority of shares awarded to employees are not yet vested. Perhaps it is year two in a five-year vesting schedule.
The employee stock or option plan might have a provision that upon takeover by another entity, employees become fully vested. It is an incentive for these employees to remain with the company until and through the acquisition.
A similar reason would be to keep employees until and through an initial public offering (IPO).
There are several forms of acceleration provisions, but the two most common are single-trigger and double-trigger. Typically, the common triggering event for both is the sale of the company or a change in its control.
Single-trigger, as discussed above, provides that at a sale or change of control, some or all of the restricted stock will immediately become vested.
A double-trigger typically starts with the sale or change of control but does not cause acceleration until a second event occurs. This second event could include the termination of the founder without cause or if he or she leaves the company within a set time period (typically six months to one year following the sale or change of control). The company can include any triggering events as long as they spell them out clearly in the employee compensation plan.