Acceleration of vesting: Overview, definition, and example
What is acceleration of vesting?
Acceleration of vesting refers to the process by which an employee or stakeholder gains full ownership or rights to certain benefits, such as stock options, retirement benefits, or other equity awards, earlier than originally scheduled. Typically, vesting occurs over a set period of time, meaning the individual must remain with the company for a certain duration before fully gaining rights to these benefits. However, acceleration of vesting can be triggered under specific conditions, such as a change in company control, an employee’s termination without cause, or other agreed-upon events, allowing the individual to fully vest in their benefits immediately or over a much shorter period.
For example, if an employee has stock options that vest over four years, the company may agree to accelerate the vesting if the employee is laid off, allowing them to immediately exercise those options.
Why is acceleration of vesting important?
Acceleration of vesting is important because it provides flexibility and security for employees or stakeholders, particularly in situations where their employment or involvement with the company is unexpectedly disrupted. It is often used as a retention tool or as a way to protect individuals in the event of mergers, acquisitions, or layoffs. It can also serve as an incentive for employees to stay with the company or as a reward for loyalty and contributions.
For companies, offering accelerated vesting can be a way to retain key employees during significant organizational changes, such as a sale or acquisition. It also helps protect the company’s reputation and ensures that employees are treated fairly under certain circumstances, potentially avoiding disputes.
Understanding acceleration of vesting through an example
Imagine a senior executive at a company has been granted stock options that vest over a five-year period. If the company is acquired, the executive’s contract includes an acceleration of vesting clause that causes all of their unvested stock options to become fully vested upon the acquisition. This means the executive can immediately exercise all of their stock options, even though they were originally scheduled to vest over several years.
In another example, an employee who is terminated without cause after three years of a four-year vesting period might have their unvested stock options accelerated, allowing them to claim the options they would have otherwise had to wait another year to fully vest.
An example of an acceleration of vesting clause
Here’s how an acceleration of vesting clause might appear in an employment agreement or equity compensation plan:
“In the event of a Change of Control or the Employee’s termination without cause, the unvested portion of the Employee’s stock options shall immediately vest and become exercisable in full. The Employee shall have the right to exercise all vested options within [X] months following such event.”
Conclusion
Acceleration of vesting is a critical feature in many employee contracts, providing flexibility and protection for individuals in the event of unexpected changes, such as job loss, mergers, or acquisitions. By accelerating the vesting schedule, companies offer a benefit to employees that can help ensure fairness and maintain morale during transitions. For both employers and employees, understanding when and how vesting can be accelerated is essential for navigating equity awards and other compensation structures.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.