Single Trigger v/s Double Trigger RSUs

When you join a tech startup, stock options are often part of the deal. They sound great—after all, who wouldn’t want a stake in the company’s success? But there’s a catch: these options come with a vesting schedule. Simply put, you don’t get to own them all at once. You might think that after a certain period, you’ll be good to go. However, it’s not just about time; the conditions tied to your vesting can significantly impact your financial future.

Let’s break it down.

Imagine you’ve been with the company for a few years, and some of your shares have vested. If you decide to leave or are let go, a single trigger ensures you take all your vested shares with you. It’s a way for the company to reward your loyalty, letting you benefit from its growth, even if your time there has ended.

Now, picture a different scenario. You’ve put in the time—maybe even four years. But there’s a twist. Your stock options won’t vest unless there’s a significant event, like an acquisition or an IPO. So, if you leave before that happens, your options remain unvested. A small clause can have a big impact on your pocket.

Both triggers are designed to keep your interests aligned with the company’s success. The triggers have a huge impact on your RSU holdings, therefore it’s important to understand the triggers. In this blog, we’ll dive into the details of these mechanisms and what they mean for you. Understanding them could make all the difference in your financial journey.

Understanding Restricted Stock Units (RSUs)

Restricted stock units (RSUs) are a popular form of employee compensation, particularly in tech companies. They come with specific conditions that employees must meet to vest, after which they can settle the units for shares and are subject to income tax. For private companies, RSUs can be structured as either single-trigger or double-trigger, each with its own implications for employees.We’ve covered what RSUs are in detail in our blog here.

What Are Double-trigger RSUs?

A double-trigger RSU requires two separate events for vesting. The first trigger is typically service-based, meaning the RSUs vest over time as the employee remains employed with the company. The second trigger occurs during a specific corporate event, such as an initial public offering (IPO) or an acquisition. To fully vest and convert into actual shares, both triggers must be met.

Example:
Consider an employee granted 1,000 double-trigger RSUs. The first trigger is a one-year cliff, meaning no RSUs vest until the employee has completed 12 months of continuous employment. After that, 750 RSUs vest monthly over the next two years. However, even after completing the time-based vesting, the RSUs will not convert into shares until a change in control event occurs, such as the company being acquired. If an acquisition happens, the vested RSUs convert into shares, rewarding the employee for their loyalty.

How Does a Double-Trigger RSU Work?

In a double-trigger RSU plan, the first trigger typically involves a one-year cliff. After this, the remaining RSUs vest based on continued service. However, the vested RSUs do not convert into actual shares until a significant corporate event occurs. This incentivizes employees to remain with the company through crucial transitions.

Advantages and Disadvantages of Double-Trigger RSUs

Advantages:

1. Retention Incentive: Double-trigger RSUs motivate employees to remain with the company during critical events, such as mergers or acquisitions, since vesting is contingent on continued employment.
2. Safeguard Against Involuntary Termination: Employees who are involuntarily terminated following a change in control may still have their RSUs vest, providing them with financial protection.
3. Alignment with Shareholder Interests: By encouraging employees to stay through significant transitions, double-trigger RSUs promote stability and help safeguard shareholder value during potentially disruptive periods.
4. Opportunity for Enhanced Compensation: If the company’s stock price increases after an acquisition or IPO, employees can benefit from substantial financial rewards through the appreciation of their vested RSUs.
5. Long-term Focus: This structure encourages a long-term perspective among employees, aligning their interests with the company’s future growth and performance.

Disadvantages:

1. Complexity in Structure: The dual-vesting conditions can complicate the understanding and management of RSUs, potentially leading to confusion among employees regarding their benefits.
2. Risk of Forfeiture: Employees who voluntarily leave the company before a change in control may lose their unvested RSUs, which can create dissatisfaction and impact morale.
3. Potential Shareholder Dilution: Converting RSUs into shares may dilute the ownership percentage of existing shareholders, which can be a concern for investors.
4. Tax Implications: Similar to single-trigger RSUs, employees may face tax liabilities upon vesting, which can create financial burdens if they are not adequately prepared for the tax consequences.
5. Dependency on Exit Events: Employees may experience uncertainty as their compensation is tied to external events, making it difficult to predict the timing and value of their RSUs.
6. Limited Liquidity: The requirement for an exit event can restrict employees’ ability to access the value of th

Double-trigger RSUs involve a time-based vesting condition that typically spans four years with a one-year cliff, meaning that employees earn shares over time but cannot fully own them until a liquidity event occurs. This can create a situation where employees miss out on equity value if they leave the company before such an event.

What Are Single-trigger RSUs?

A single-trigger RSU is a type of equity compensation where the vesting of the RSUs depends on one specific event, usually either the passage of time or the achievement of specific performance goals. If an employee meets the vesting criteria—such as remaining employed for a certain period or the company reaching predetermined milestones—the RSUs will vest and convert into actual shares. Single-trigger RSUs eliminate the need for an exit event for full vesting. Employees can settle shares as they vest, enabling them to participate in liquidity events without waiting for a company sale or IPO.

Example:
Suppose an employee is granted 1,000 single-trigger RSUs with a four-year vesting schedule. After one year, 250 RSUs vest, and the remaining 750 vest quarterly over the next three years. If the employee stays with the company and meets performance targets, they will receive shares based on this schedule.

Conclusion

Ultimately, both single-trigger and double-trigger RSUs have their respective advantages and challenges. Understanding these structures is vital for employees to maximize their equity compensation and navigate the tax implications effectively.