Accelerated Vesting - Explained
What is Accelerated Vesting?
Written by Jason Gordon
Updated at July 10th, 2021
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Table of Contents
What is Accelerated Vesting?How does Accelerated Vesting Work? Reasons to Use Accelerated VestingAcceleration TriggersAcademics Research on Accelerated VestingWhat is Accelerated Vesting?
Vesting refers to a legal right over an assets, or future payment earned by an employee and vested by the employer. There is often a set time that an individual begins to enjoy a vested right over an asset, accelerated vesting allows the individual has access to a vested property or asset before the scheduled time. Accelerated vesting grant an employee quickened access to a company's share, stock or property vested to them by the employer. It avails an employee with a vested right to access to a future payment, asset (share, stock), or benefit sooner than expected.
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How does Accelerated Vesting Work?
Vested right is usually conferred on an employee with exceptional performance, the employer grants a vested right to such a person which means he holds a legal right to an asset, a future payment or benefit from the company. However, accelerated vesting enables an employee access rewards before the scheduled time. A company that consents to accelerated vesting agrees that the employee with the vested right would enjoy an asset, a payment or benefit sooner. The company then releases all benefits before the earlier scheduled time. This is often done for highly valued employees. An accelerated vesting increases the present value of an employee that enjoys it. However, companies face the risks of accelerated vesting since it is possible to accelerate the normal vesting of an employee and he deserts the company after collecting the benefits.
Reasons to Use Accelerated Vesting
A company can decide to accelerate the normal vesting of an employee for a number of reasons. For some companies, it is a technique for presenting themselves as valuable and attractive. For instance, a startup company might use accelerated vesting to make itself appealing to an acquiring or public company. Also, such a company might have an employee incentive plan that states that employees who stay with the company until an IPO will be fully vested. Highly valued employees are also drawn to companies that accelerate normal vesting than those that do not.
Acceleration Triggers
Many factors that trigger a company to accelerate normal vesting. They are called acceleration triggers. There are two common acceleration triggers; the single-trigger and double-trigger. Under a single-trigger, some restricted stock or shares owned by a company become vested to employees when the company is sold, acquired or there is change in control and management of the company. On the other hand, double-trigger holds that acceleration vesting is not granted just when there is a sale but at the occurrence of a second event, which is the termination of appointment by the founder of the company.
Academics Research on Accelerated Vesting
- Accelerated vesting of employee stock options in anticipation of fas 123r, Choudhary, P., Rajgopal, S., & Venkatachalam, M. (2009). Journal of Accounting Research, 47(1), 105-146. Fair value-based criteria attribute to value employee stock options via the Financial Accounting Standard(FAS) was enacted by the Financial Accounting Standards Board(FASB) in December 2004. Several firms while expecting FAS 123-R optimized ESOs vesting between March 2004 and November 2005. This is to discard accepting the present invested ESO grants at fair value in subsequent financial statements. Accelerated vesting's prospect is higher if (1) it impacts future ESO compensation cost (2) if firms encounter more agency setbacks, followed by lower pension fund ownership, few blockholders and top five representatives in possession of a greater share of ESOs.
- Managerial short-termism and investment: Evidence from accelerated option vesting, Ladika, T., & Sautner, Z. (2018). Available at SSRN 2286789. We posited that long-term investment was cut by executives when returns are more short-term. A scenario where hundreds of firms removed the vesting periods of options to avoid income reduction was examined. This scenario permitted corporate leaders to implement options in the short term and benefit while enhancing the short-term result. Our study examined that the adoption of FAS 123-R was intermittently staggered by the end of the fiscal year of the firm. Investments were cut by business proprietors and earnings at the short -term period were reported as high after option skyrocketed.
- Accelerated vesting in takeovers: the impact on shareholder wealth, Elkinawy, S., & Offenberg, D. (2013). Financial Management, 42(1), 101-126. We examined the influence of accelerated vesting of awarding equity on takeovers, in a situation where stock options or restricted stock options of the prospective CEO vest immediately and turns out to be unrestricted at the close of the acquisition. Our finding was that takeover premium were on the high side when the CEo received the accelerated vesting results compared to a firm where the CEO's that has progressive vesting in their awards after the deal has ended. We find out that cash shortage caused by accelerated vesting is for the benefits of equity holders in complete deals.
- Accelerating vesting of employee stock options to avoid expense recognition, Elayan, F. A., Meyer, T. O., & Li, J. (2007). The focus of this study is how firms accelerate the vesting of stock options before FAS 123(R) was implemented. The heartbeat of this research is that firms choosing to accelerate does to benefit from having option expenses canceled in a single footnote agreement. There is no support by the evidence for positive outcomes emanating from acceleration claims by those propounding it. Instead, this choice aligns with management operating based on self-interest by scaling down the effects of their option-based rewards on income reported while increasing the value of their option.
- Accelerated vesting of employee stock options: Principles and strategies, McIntosh, C. M., & Harmetz, L. S. (2002). Compensation & Benefits Review, 34(2), 60-64. Majority of company stock options plans possess vital provisions that cater for accelerated vesting of options when there is a takeover. What is the modus operandi? What different forms of guidelines can an option plan possess concerning accelerated vesting? Any implication? Who benefits or suffer from the terms or provisions? How can it help the company, its workers, shareholders and prospective acquirers? Any impact during a merger? What techniques are adopted by parties to a corporate merger to respond to existing terms? This article has all the answers.