Accelerated Vesting

What does accelerated vesting mean?

Accelerated vesting (early vesting of equity) refers to a contractual provision under which an equity stake becomes fully earned ahead of schedule on a specified event. Normally, an equity stake is earned gradually over several years under a vesting plan; only the earned portion is vested, meaning that it is retained even if the holder leaves. Acceleration makes the portion not yet earned vest immediately, in whole or in part. The trigger is almost always a change of control (Change of Control), that is, the sale of the majority of the shares or of the entire business. In contracts the provision is also called an acceleration clause.

The provision affects two groups: founders whose shares are subject to reverse vesting, and employees in an equity participation programme (ESOP), usually a virtual programme (VSOP) without actual shares. For both groups the clause decides which part of the stake counts economically on a sale and which part lapses. It is set out in the shareholders' agreement, in the participation plan or in individual commitments to key people.

How it works: vesting plan and acceleration

A common arrangement is a vesting plan over four years with a cliff of twelve months, during which nothing is earned. After the cliff has expired, a quarter vests and the remainder accrues monthly.

Acceleration breaks through this timetable. It provides that, on a defined event, part or all of the outstanding stake is treated as earned immediately. Three variables determine how it is structured:

• Trigger: which event sets the acceleration in motion, that is, the sale alone or the sale together with the termination of service.
• Scope: whether the entire outstanding portion vests (full acceleration) or only part of it, for example 50% or the next twelve monthly instalments (partial acceleration).
• Time limit: within what period after the sale the second trigger must occur.

Single trigger and double trigger

Single trigger

Under a single trigger, one event is enough, as a rule the completion of the company sale. On completion (closing), the entire outstanding stake vests, regardless of whether the beneficiary stays with the company afterwards.

This is the most favourable variant for the beneficiaries. From an acquirer's perspective, however, the retention effect of the existing stake is lost. The team has fully earned its share of the sale proceeds and no longer has any economic incentive to stay after the sale. Acquirers respond with new retention instruments such as retention bonuses (Retention Bonuses) or an earn-out, a part of the purchase price that depends on later business performance, and factor their cost into the purchase price.

Double trigger

Under a double trigger, two events must coincide: the change of control and the termination of service within a certain period after completion. Typically covered are dismissal by the company without good cause and resignation by the individual for a contractually defined good reason (Good Reason). If the person stays with the company, vesting continues under the original plan.

In financing and company acquisition agreements, the double trigger is regarded as a balanced solution for founders and key people. The beneficiaries are protected against losing their outstanding stake after a sale through no action of their own. The acquirer retains the retention effect of the ongoing vesting and does not have to recreate it with additional capital.

The definition of good reason (Good Reason)

A double trigger is only as effective as the definition of the second trigger. Without a good reason provision, an acquirer can formally keep the beneficiary with the company while changing their duties, pay or place of work so much that staying becomes unreasonable. Acceleration then does not apply. Typical grounds are a material reduction in pay, a substantial reduction in duties and authority, and a relocation of the place of work beyond a specified distance.

For founders who are managing directors, a further point arises: under Section 38(1) of the German Limited Liability Companies Act (GmbHG), the appointment as managing director can in principle be revoked at any time. Removal without an equivalent new role is therefore often expressly included as Good Reason. The company is often given a cure period, within which it can reverse an objectionable change before the acceleration is triggered.

Legal implementation in Germany

Founders: reverse vesting of GmbH shares

Founders of a GmbH (German limited liability company) hold their shares from the outset. They therefore undertake to transfer a declining portion of their shares on early departure, usually through call options of the company, the co-shareholders or the investors. The price is determined by the rules on good leaver and bad leaver; under Section 15(4) GmbHG the undertaking must be notarially recorded.

Here the acceleration operates as the lapse of the obligation to transfer the shares back: with the change of control or, under a double trigger, with the additional departure, the call options for the portion not yet earned expire. If the founders sell all of their shares at the exit anyway, the question moves into the purchase agreement. In this situation acquirers often require that part of the founders' proceeds be tied to continued service, for example through an earn-out, a retention on an escrow account or a reinvestment in the acquirer.

Employees: virtual shares (VSOP)

Employees of German growth companies mostly hold virtual shares, that is, a contractual claim to a payment measured by the proceeds per share at the exit. The participation plan regulates whether virtual shares not yet earned lapse at the exit, are accelerated in whole or in part, or are converted into a payment claim tied to continued service. Because virtual programmes are generally settled at the exit, the acceleration rule here directly determines the amount of the payout.

Tax treatment of acceleration

Acceleration does not change the tax classification of an equity stake, but it determines the timing and amount of the taxable event. Payments from virtual shares are employment income and are subject to wage tax withholding and social security contributions when paid out. Because the tax is matched by a cash inflow, no liquidity problem arises.

For actual shares and options, by contrast, a non-cash benefit can trigger wage tax before any sale proceeds are received; Section 19a of the German Income Tax Act (EStG) can defer it for certain companies. For founders, the proceeds from the sale of their shares are in principle a capital gain on disposal. Vesting and leaver rules tied to service can, in individual cases, affect the distinction from employment income. Their structure therefore belongs in the tax review before notarisation.

Worked example: accelerated vesting with single and double trigger

An employee holds 1,200 virtual shares with a base price of EUR 20 per share; this amount is deducted from the payout per share. Vesting over 48 months has been agreed, with a cliff of twelve months and monthly accrual thereafter. After 30 months the company is sold. After the liquidation preferences, the investors' priority rights in the distribution of proceeds, have been satisfied, proceeds of EUR 120 are attributable to each share.

• Earned after 30 months: 30/48 of 1,200 = 750 virtual shares
• Not yet earned: 1,200 minus 750 = 450 virtual shares
• Value per virtual share: EUR 120 proceeds minus EUR 20 base price = EUR 100
• Without acceleration: 750 × EUR 100 = EUR 75,000, and the remaining 450 shares lapse
• Single trigger with full acceleration: 1,200 × EUR 100 = EUR 120,000 at the exit
• Partial acceleration by 50% of the outstanding portion: (750 + 225) × EUR 100 = EUR 97,500
• Double trigger: EUR 75,000 at the exit; a further EUR 45,000 immediately if the employment is terminated without good cause within twelve months or the employee leaves for Good Reason. If he stays, he earns the 450 shares over the following 18 months under the original plan

All amounts are stated before wage tax and social security contributions. The example also shows the acquirer's perspective: the purchase price calculation regularly treats payment claims under participation programmes that are triggered by the sale as debt-like items. They reduce the equity value, that is, the purchase price for the shares, and thereby the proceeds of the selling shareholders.

Negotiating practice in financing rounds and sales

• For founders and managing directors, a double trigger with full or partial acceleration is often agreed. A single trigger is the exception and, if granted at all, is usually granted only for part of the outstanding stake.
• Broad-based employee programmes regulate acceleration uniformly in the participation plan. Deviations for key people are recorded in individual commitments and must be aligned with the plan.
• Investors in a financing round take care that acceleration rules do not make a later sale more expensive or block it. Conversely, rules that are too restrictive can reduce the team's willingness to support a sale.
• In due diligence, the in-depth review before the purchase, acquirers examine all participation plans and individual commitments.

Distinction: accelerated vesting, leaver rules and change of control

• Vesting: the basic mechanism under which an equity stake is earned over time. Accelerated vesting is the contractually regulated exception to this timetable.
• Good leaver and bad leaver: regulate the consequences of departure independently of a sale. Under a double trigger, the leaver classification helps determine whether the second trigger has occurred.
• Change of control: defines the event that triggers the acceleration. The acceleration regulates the consequence that this event has for the equity stake.

Common mistakes

• Unclear definition of the trigger. If the clause covers only the sale of shares, an asset deal, a merger or a stepwise acquisition of a majority may not fall within it.
• Discretion instead of entitlement. Wording under which the management or an advisory board “may” resolve an acceleration does not create an enforceable entitlement.
• No good reason provision. Without one, a double trigger comes to nothing in the case of a de facto demotion, because the beneficiary remains formally employed.
• Time limit for the second trigger too short. A period of three months generally does not cover an acquirer's integration decisions. Twelve months is common.
• No alignment with the leaver rules. If the acceleration and the bad leaver clause contradict each other, it is unclear which rule applies in the event of a conflict.
• Costs not planned for. Sellers who quantify the cost of accelerated programmes only in the purchase price negotiation lose negotiating room.

Frequently asked questions

What is the difference between a single trigger and a double trigger?

Under a single trigger, the company sale is enough for the outstanding stake to vest. Under a double trigger, service must also end within an agreed period after the sale, for example through dismissal without good cause or through resignation for Good Reason.

Does accelerated vesting also apply on dismissal without a company sale?

As a rule, no. Without a change of control, the leaver rules apply: earned shares are retained or not depending on the classification, and unearned shares lapse. Some plans let vesting continue for a few more months for good leavers, but that is not acceleration in the strict sense.

Does accelerated vesting also apply on an IPO?

As a rule, no. An IPO is not a change of control; the company continues to exist with its team. Participation plans therefore usually treat the IPO separately, for example by converting virtual shares or by continuing vesting after the IPO.

Is accelerated vesting common in German employee programmes?

Practice is inconsistent. Some virtual programmes pay out only the earned portion at the exit, while others accelerate in full or in part. The decisive factor is solely the relevant participation plan, not general market practice.

Can an acquirer cancel existing acceleration clauses?

Not unilaterally. These are contractual entitlements of the beneficiaries. Acquirers therefore often negotiate with key people a waiver of the acceleration, in exchange for a new retention package of retention bonuses or an equity stake in the acquirer.

The Roemer Capital view

Roemer Capital reviews existing vesting and participation arrangements even before a financing round to determine whether they can support a later sale. This includes a clear definition of the change of control, a double trigger with a clearly defined Good Reason for founders and key people, and consistent alignment with the leaver rules. The legal drafting rests with the company's law firm; Roemer Capital's contribution is the economic assessment.

In a sale process, Roemer Capital records all acceleration entitlements early and includes them in the purchase price bridge, the reconciliation from enterprise value to the purchase price for the shares. The costs are thus established before an acquirer raises them in due diligence as a deduction item, and the negotiation on retention packages for the team begins on a reliable numerical basis.