January 25, 2022
Double trigger vesting allows workers and companies to time the taxation of stock grants to a liquidity event. This avoids a huge tax bill at a time when the worker does not have the cash to pay a tax bill. This delayed trigger avoids many of the problems present with stock options. Facebook is known for pioneering this legal tech. It was the key mechanism that motivated workers and made a lot of them very rich.
So let’s dive a bit deeper into how this all works.
Double-trigger restricted stock units (RSU) represent a company’s promise of future equity compensation upon the fulfillment of two distinct events or conditions. It’s becoming more and more popular with private companies as they allow taxation to be delayed at a time when the worker has sufficient cash or liquidity to pay off the taxes. This is unlike the single-trigger RSUs used by some publicly-held companies to compensate directors and executives which are taxable as soon as they vest.
But when did well-established companies start using it and why do they prefer it?
Now, let’s go way back in internet time. Back to 2012. Imagine you’re running Facebook and you have to solve a huge problem. You need to offer equity that really motivates your workers to ensure that you can win the battle of social media dominance! So what do you do?
Facebook decided to invent a twist on Restricted Stock Units (RSUs).
As mentioned above, RSUs represent a company’s contractual promise to pay out equity in the future upon the satisfaction of a condition or occurrence of an event. Once they vest, the RSUs are settled and paid out as equity or shares of stock. The great thing about RSUs as compared to stock options is that they are always worth something as long as the value of the underlying stock is not zero. Stock options, on the other hand, can end up with the worker losing money if the market value of the stock or equity falls below the exercise price.
RSUs can have a single-trigger or double-trigger vesting mechanism. It is important to take note that single-trigger RSUs have tax consequences once they vest. This is why RSUs with double-trigger vesting are preferred by most startups and private companies as they will only trigger taxation once the second vesting condition is met and the equity is paid out.
This is something that Facebook figured this out early on.
Previously, workers at pre-IPO companies were not able to sell a portion of their RSUs to pay their income tax. This forced them to spend personal money to get their stock! To avoid this, Facebook put in a second vesting condition, also known as a “double trigger.” This second vesting condition would only be met once a liquidity event occurred such as the company getting acquired, an Initial Public Offering (IPO), or a direct listing.
Including this additional trigger allows a company to keep a portion of the stock promised to a worker not technically vested. Once there is liquidity (cash) from the IPO, listing, or acquisition, then the final vesting trigger gets pulled and then the company does what’s called a “sell to cover.” All or a portion of the worker’s stock is sold to pay the tax on the stock the worker has received. This way workers can relax, knowing that they will probably not have to pay out of pocket for tax or legal guidance in order to receive and deal with stock options.
Because it’s basic math:
These days most professionals we talk with who have received both options and RSUs say that they far and away prefer RSUs. They are simple to deal with and are easy to understand their value. That’s why Upstock offers RSUs with double trigger vesting as well as fixed equity plans, all without the high cost of attorney’s fees. Upstock’s high-quality RSU plans can be adjusted and customized to fit the needs and requirements of any company no matter what stage it is in. If you want to learn more about how we do it, you can book a demo here.
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