Fighting the Double Trigger as Free Labor vs Slavery: How to Negotiate Your Own Change of Control Acceleration Terms
This post was originally published in CEO World on September 16, 2023.
A change of control, such as in a merger/acquisition, can have significant implications for the C-suite executive. You may face the risk of getting laid off, reduction in compensation and benefits, changes in reporting structure, restrictions in seeking new employment due to non-compete or non-disclosure agreements, and much more.
Offsetting these risks to the C-level executive are potential benefits that can flow from a change of control. These often include acceleration of equity vesting that can be quite valuable.
However, despite the success achieved by the CEO or other C-level executives leading the company to a successful change of control and perhaps to a liquidity event for the investors, as a C-level officer, you might face a further post-closing hurdle that can diminish or even prevent your receiving the benefits and your fair share of the success event which may be largely the result of your efforts. This article discusses those additional hurdles placed before you, often called the “double trigger.” At the end, this article suggests a series of strategies for you to resist the double trigger, building toward and culminating with an invocation of Lincolnian arguments from 19th century US history: Free labor vs Enslaved labor. Hence, this article’s title.
Certainly, the Double Trigger is widely used and accepted, but that doesn’t have to be so. For CEOs, C-level, and senior executives, who may have leverage, this article tries to offer aid in your resistance.
Importance of Liquidity Event to Angel, VC and PE Backed Companies
In recent years, over 5 million new US businesses have been started each year1. Fewer than half receive any significant funding, with the largest funding source being friends and family ($60 billion), angels ($20 billion), VC investors ($22 billion), and customers ($2.8 billion).2 For companies obtaining funding, 65,000 to 70,000 receive VC and angel investment.
Thus, this article is addressed to CEOs of the minority of US businesses that do have VC and angel funding, because those companies have investors who expect to be paid back and receive an ample return on investment (ROI), which is the way they make their living. That ROI most often comes from a liquidity event, such as a merger, an acquisition or public issue of shares (an IPO). It was reported that 89,556 VC-backed companies exist in the last year3.
When you accept a C-level executive job offer with a VC, angel or PE-backed company, you know that a successful exit and liquidity event is the goal of the investors and company backers, and that your hiring was in part and perhaps in significant part because the investors believe you can lead or help lead to that liquidity event.
The Single Trigger on Change of Control – Issues to Watch
Because the goal of a successful liquidity event is so important to investors, the CEO or directors, in deference to the desires of their investors, will often tie C-suite executive compensation and benefits to “performance” measured by achievement of the success event. It is not uncommon that all or a significant part of equity is tied to the closing of the liquidity event. CEOs and C-level executives as well will seek vesting acceleration tied to closing of the liquidity event and sometimes that is even included in equity plan documents to motivate an even broader pool of executives toward achieving the liquidity event.
To provide in your offer letter or employment agreement or an equity plan document for 100% vesting acceleration on the closing of a liquidity event, a merger, acquisition or change of control is called a single trigger.
Sometimes the single trigger is deficient because a public offering of shares, an IPO, is left out. However, as a CEO or C-level executive, you should seek inclusion of the IPO or licensing agreement or other distributions where the investors are paid off. When you are so crucial to that successful pay day, you should not be left out. You, too, should get your pay day with the investors.
Additionally, a second risk with the single trigger is misalignment. This occurs when the investor sets limits for you but not themselves. For example, your employment term states that you get acceleration only if the company sale is for a multiple of 3x. Then the investors decide to sell for a 2.9x multiple, and you end up getting no acceleration or bonus or dramatically less. That is not right! You should be rewarded based on the level of your achievement, especially where the choice to close is the Board / investors and not you as the CEO. My earlier CEO World article “Don’t Let Misalignment Create Your Own Black Sox Scandal” speaks to this issue.
The Double Trigger and Risks Posed to You
The main concern of this article is when the investors are not content with a single trigger and seek a second “double trigger” before you can achieve your bonus or acceleration.
In the case of the double trigger, your job offer or other executive compensation or equity documents will tie your bonus or acceleration first to the closing of liquidity or success event (single trigger) and then also to your continuing service for the successor company for up to a year and sometimes longer. Thus, two distinctly different obligations must be met – hence the name double trigger.
Often the second trigger of the double trigger will be cast that if you don’t remain in employment for the successor entity after the change of control for a fixed term, generally one year, you lose your bonus or acceleration. Other times, it will be cast that you will earn your bonus or acceleration only if you are terminated without cause by the successor entity within one year of the change of control.
Both of these formulations have significant risks to the C-level executive. In the first instance, you get no payout if you resign even if for good reason. Sometimes, this is alleviated by allowing your payout for certain resignations for good reason – such as a big cut in pay, relocation or big reduction in your duties – but it still poses risks for you, especially if it is up to the successor company to determine if good reason has occurred. The second instance can be even worse because if the company chooses not to terminate you within the first year, your bonus or acceleration lapses entirely.
Negotiation Strategies to Achieve Single Trigger
The Board or company counsel will defend the double trigger, saying that these kinds of terms offer you some job protection in case the new employer wants to terminate you. They will also defend the double trigger as a necessary part of the change of control transaction to assure the closing.
To the contrary, I would argue that to ensure you receive the executive compensation you deserve, you should resist the second trigger. It is only fair that when the investors and owners get their big pay day, the CEO, C-level and key executives who made that possible should get theirs too. If you stay through the closing of liquidity event, you should be 100% vested for acceleration and be paid your full change of control bonus.
When I hear the argument that tying up your acceleration is necessary to show your commitment to the successor in order to make the deal happen, my response is yes and no. The deal might well happen anyway, but with the key executives’ retention baked in the deal, terms and pricing are likely to be even more favorable to the owners and investor.
When I see the investors receiving a premium because executives are denied their liquidity premium until a later day, if ever, it gives an appearance of “theft of labor.” In one particularly egregious double trigger, the executives had to remain with the successor with no limit as long as the successor determined. Thus, I typically resist the double trigger with the kind of vigor that Abraham Lincoln and the early Republicans of the 1850s, displayed in their passionate arguments in favor of the rights of Free Labor against Slavery and the “Slave Power”. If there is to be retention with the successor, I want the executive to have the rights of free labor to be able to negotiate his or her own retention terms with the successor and be forced to accept continuation if the retention terms do not meet the executive’s needs.
When I think of the Double Trigger, the words of Lincoln in his 7th and final debate with Stephen A. Douglas, come to mind:
It is the eternal struggle between these two principles—right and wrong—throughout the world. They are the two principles that have stood face to face from the beginning of time; and will ever continue to struggle. The one is the common right of humanity and the other the divine right of kings. It is the same principle in whatever shape it develops itself. It is the same spirit that says, “You work and toil and earn bread, and I’ll eat it.” No matter in what shape it comes, whether from the mouth of a king who seeks to bestride the people of his own nation and live by the fruit of their labor, or from one race of men as an apology for enslaving another race, it is the same tyrannical principle. “
Abraham Lincoln, at Alton, Illinois, October 15, 1858 https://teachingamericanhistory.org/document/the-lincoln-douglas-debates-7th-debate-part-ii/
https://www.c-span.org/video/?59826-1/lincoln-douglas-alton-debate – at 1:58:11 in this 2 hour 39 minute video.
It is not just the case of the C-level executives leading the company to a successful sale event and not being paid with the investors, but also the continuation in service that forces you to give up other valuable opportunities you might have and you ought to be able to explore with your acceleration or closing bonus paid and in your pocket.
In a recent case, my executive client was told she had to agree to a double trigger because the successor company would not do the deal without her continued employment but also would not agree to negotiate any retention terms with her. In that instance, I said she still deserved her bonus / acceleration on closing (that is the single trigger) and then to be able to negotiate her further retention bonus to stay on. My recommendation was all of that in this instance, all of those negotiations occur with the seller’s investors, and that her single trigger bonus or acceleration equivalent come out of the investor’s share of deal proceeds, and to the extent needed her retention bonus post sale also come from those investors. So, as we conclude, I ask: Do you have a double trigger in your employment contract or executive job offer? Is the amount you expect to gain from a change of control significant? If so, my suggestion is don’t wait till a change of control actually occurs at your company. Consult an experienced executive employment agreement attorney to ensure your interests are adequately protected in those situations.
More articles about change of control terms:
- A Change of Control Agreement Saves the Day When Your Company Is In Play
- Change of control agreements – a quick guide for CEOs, CFOs, and other senior executives.
- Negotiating Executive Retention Agreement Terms to Protect Your Interests
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