Accelerated Vesting – To do or not to do

Experienced managers being recruited into expansion stage companies tend to push for accelerated vesting of the their stock options upon a change of control event. At the expansion stage, CEOs tend not to put a lot of thought into the company exit strategy. And that is where the board of directors needs to provide some guidance.

The key issue with granting accelerated vesting is how it will be perceived by the acquiring company upon an impending change of control. The acquiring company would prefer that the acquired company’s senior team is not fully vested. This ensures that these key individuals will still be motivated post-acquisition. The more vested they are, the more the acquirer will have to provide in additional compensation to retain them.

This issue can become an impediment to an acquisition, and will certainly have an impact on the acquisition price.

From a company perspective, the board should push back on any accelerated vesting. Especially that once the first exception is made, it is very hard to push back on granting it to future management hires.

From the CEO’s perspective, accelerated vesting should not be a deal breaker in the hire of a key manager into the company.

So where’s the happy medium? I tend to lean towards pushing back to the point where the acceleration is a deal breaker… and giving in to 50% acceleration upon exit, with a double trigger (full acceleration if the manager is let go by the acquirer.)

Two good reads on the topic:

http://www.mbbp.com/resources/business/equity_compensation.html

http://www.feld.com/wp/archives/2005/05/term-sheet-vesting.html