What is the Difference Between Single and Double-Trigger RSUs?

Do you know how early-stage companies compensate for their top talent? One of the most popular forms of equity compensation used by these startups is Restricted Stock Units (RSUs). But when it comes to RSUs, there are two distinct types: single-trigger and double-trigger. Understanding the difference between these two can be crucial for employees and potential hires. So, what exactly are RSUs, and how do single-trigger and double-trigger RSUs differ?

What are Restricted Stock Units (RSUs)?

Restricted Stock Units (RSUs) are a form of equity compensation that represents the right to receive shares of a company's stock at a future date, typically upon meeting certain vesting requirements. Essentially, RSUs allow employees to share in the company's success and growth.

What is Single-trigger RSU?

A single-trigger RSU is a type of equity compensation where the vesting of the RSUs is contingent upon a single event, typically the specific period (passage of time) or the achievement of specific performance goals. This means that 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 of the company's stock.

How does Single-trigger RSU work?

In a single-trigger RSU plan, the vesting schedule is typically based on a combination of time and performance goals. For example, an employee may receive a grant of 1,000 RSUs that vest over a four-year period, with 25% vesting after the first year and the remaining 75% vesting quarterly or annually thereafter. If the employee meets the vesting requirements, they will receive the corresponding number of shares upon vesting.

What is Double-trigger RSU?

A double-trigger RSU is a type of equity compensation where the vesting is contingent upon two separate triggers. 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 upon a specific corporate event, such as an initial public offering (IPO) or an acquisition (exit event). For a double-trigger RSU to fully vest and convert into actual shares of the company's stock, both triggers must be met.

How does Double-trigger RSU work?

In a double-trigger RSU plan, the first trigger typically involves a one-year cliff, where no RSUs vest until the employee has completed 12 months of continuous employment. After the one-year cliff, the remaining RSUs vest monthly or quarterly over the next few years based on continued service.  

However, even after this time-based vesting schedule is complete, the vested RSUs do not convert into actual shares until the second trigger occurs – a specific corporate event like an initial public offering (IPO) or an acquisition. Once both the employment vesting and the liquidation event triggers are met, the vested RSUs are then released, and the employee receives shares of the company's stock. This two-step vesting process incentivizes employees to remain through a major liquidity event.

Advantages and disadvantages of Single-trigger RSU:

Advantages:

1. Simpler vesting structure: Single-trigger RSUs have a straightforward vesting schedule based on time or performance goals, making them easier to understand and manage.

2. Potential for earlier vesting: Employees may be able to vest and receive shares earlier if they meet the vesting requirements, providing an incentive to stay with the company.

3. Alignment with company goals: Performance-based vesting can incentivize employees to work towards achieving specific company objectives.

4. Potential for higher compensation: If the company's stock price increases significantly, the value of vested RSUs can provide substantial compensation.

Disadvantages:

1. Potential for forfeiture: If an employee leaves the company before fully vesting, they may forfeit unvested RSUs, which can be a significant loss of potential compensation.

2. Dilution of existing shares: As RSUs vest and convert into shares, it can dilute the ownership of existing shareholders.

3. Potential for underperformance: If the company's stock price declines, the value of vested RSUs may be lower than anticipated.

4. Taxation implications: Employees may face tax liabilities upon vesting, even if they do not sell the shares immediately.

Advantages and disadvantages of Double-trigger RSU:

Advantages:

1. Retention incentive: Double-trigger RSUs can encourage employees to remain with the company through a change in control event, as vesting requires continued employment after the event.

2. Protection against involuntary termination: If employees are involuntarily terminated or resign for good reason after a change in control, their RSUs will vest, providing compensation.

3. Alignment with shareholder interests: By incentivizing employees to stay during a critical transition, double-trigger RSUs can help ensure a smooth transition and protect shareholder value.

4. Potential for higher compensation: If the company's stock price increases after a change in control, the value of vested RSUs can provide substantial compensation.

Disadvantages:

1. Complexity: Double-trigger RSUs have a more complex vesting structure, which can be challenging to understand and administer.

2. Potential for forfeiture: If an employee voluntarily leaves the company before a change in control event or after the specified period following the event, they may forfeit unvested RSUs.

3. Dilution of existing shares: As RSUs vest and convert into shares, it can dilute the ownership of existing shareholders.

4. Taxation implications: Employees may face tax liabilities upon vesting, even if they do not sell the shares immediately.

Conclusion:

The choice between single-trigger and double-trigger RSUs can have significant implications for both employees and companies. Single-trigger RSUs offer a simpler vesting structure and potential for earlier vesting, while double-trigger RSUs provide additional protection and incentives during a change in control event.  

Employees must carefully evaluate these differences to make informed decisions about their compensation packages and ensure alignment with their career goals and financial objectives. Companies, on the other hand, must thoughtfully consider the potential impact on employee retention, shareholder value, and overall compensation strategy when designing their RSU plans.

FAQs:

1. What happens to RSU if you leave a company?

If an employee leaves a company before fully vesting in their RSUs, they typically forfeit any unvested RSUs. The vested portion of RSUs may be subject to specific terms and conditions outlined in the company's RSU plan.

2. What is Single-trigger vs. Double-trigger RSU vesting?

Single-trigger RSU vesting is based on a single event, such as continued employment or meeting performance goals, while double-trigger RSU vesting requires two separate events, typically a change in control event and subsequent involuntary termination or resignation for good reason.

3. What are the tax implications for Single-trigger RSU and Double-trigger RSU?

For both single-trigger and double-trigger RSUs, employees are typically subject to income tax and potentially other taxes upon vesting, based on the fair market value of the shares at the time of vesting. The specific tax implications may vary depending on the individual's circumstances and applicable tax laws.

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