M&A Case Studies: Feedburner

This MBA Mondays M&A case study is about the effect that stock option acceleration provisions have on M&A transactions. I am reblogging a blog post that Feedburner founder/CEO Dick Costolo (now Twitter CEO) wrote in the wake of the acquisition of Feedburner by Google. This post is still live on the web at its original location. While the names are fictional, the situations are not. It's a really good read and addresses a whole host of issues that you will face as you think about stock option acceleration for your team.


Question number 1 comes from an invisible Irish gentleman named Bernie in Wichita. Bernie writes, “Can you explain options acceleration? And when would I want to use it? And when wouldn’t I? And what’s single trigger vs. double trigger acceleration and how do you feel about those kinds of things?”

Those are great questions Bernie! Hopefully, I can at least get you to realize there's a lot to think about here. Let’s dive right in.

Most options plans for your employees have a vesting schedule the defines how the options vest (ie, when the employee can exercise them). Vesting schedules for tech startups all generally look like a four year vesting period, with 25% of the total options grant vesting on a one year cliff (ie, nothing vests for a year and then 25% of the options vest on the 1 year anniversary), and then the rest of the options vest at 1/48th of the total options every month for the next 36 months.

Now let’s say you’ve got this classic vesting schedule and you hire somebody named Bobby Joe after you’ve been in business for one month, and he gets an options grant equal to 1% of the total outstanding shares. He works hard at your company for 11 months, after which your company is acquired for an ungodly sum of money. The acquirer decides that they were buying your company because of it’s cool logo and they don’t need any actual employees so they are all terminated effective immediately.

Bobby Joe’s options are worth how much? If you answered “Bubkas”, “Zero”, “nothing” or laughed at the question, you are correct. Although Bobby Joe has worked at the company for almost the entire life of the company, he gets nothing and the person that started 30 days before him gets 25% of their total options value. Doesn’t seem fair. Or as Bobby Joe would undoubtedly say “I’m upset, and I will exact my revenge on you at some later date in a compelling and thorough fashion”

Enter acceleration. Acceleration in an options plan can cause vesting to accelerate based on some event, such as an acquisition. For example, you might have a clause in your plan that states that 25% of all unvested options accelerate in the event the company is acquired.

If Bobby Joe had acceleration like this, he’s happier. He may still not be as happy as the person hired a month before him who also accelerates and now has 50% vested (the first year cliff and the extra 25% acceleration), but it sure feels a lot better to be Bobby Joe in this scenario.

That brings us to single trigger, double trigger, full acceleration, partial acceleration, etc.

We’ll start with full vs. partial acceleration. Full acceleration means that if the accelerating event happens, 100% of unvested options are vested and the employee is fully vested. If you started your job last Wednesday, the board approved your options grant on Thursday with full acceleration, and the company was acquired on Friday, congratulations, you just vested 100% of your options….you are just as vested as Schmucky in Biz Dev who was employee number 2 and started 3 years and 10 months ago (although shmucky may of course have a larger total number of options than you).

Partial acceleration we already referred to; this is how we refer to vesting some remaining portion of unvested options, such as 25% of the remaining unvested options.

Ok so far? Good, we are coming to the fun part. Let’s say you bootstrap your startup that’s selling bootstraps on bootstrap.com for two years and then let’s say you have a 20% options pool that was created as part of an A round financing. Over the next 6 months you hire a whole bunch of people, you allocate 15 percent of the options pool, and an acquirer comes along. Do you think the shareholders (common and preferred) are going to be more excited about full acceleration or partial acceleration? Full acceleration dilutes the shareholders 15%, whereas partial acceleration only dilutes the shareholders…well, partially. As a variation on this example, let’s say you hired employee number 1 when you started bootstrapping and you allocate the same number of options to everybody. The guy who started last Tuesday is going to make just as much as employee number 1.

For these kinds of reasons, you will frequently see investors and others argue for partial acceleration. Options holders and those negotiating their employment of course prefer full acceleration. This can be the cause of lots of board arguments in the early going as you and your investors decide how acceleration will work in your company options plan (or with employees who want to negotiate additional acceleration on top of the existing plan). Hold this thought for a moment while we hop across town to learn about single trigger, double trigger, etc.

Single trigger acceleration simply means that there is one kind of event in the options agreement that triggers the acceleration of some or all options. Single trigger usually refers to an acquisition. Double trigger (and I suppose triple and quadruple trigger) acceleration means that there are multiple kinds of events that can trigger the vesting of options. Double trigger acceleration usually refers to a situation in which the options plan grants partial acceleration on an acquisition, and then further acceleration (perhaps full, perhaps additional partial) if the employee is terminated (eg, our first example where they’re buying the company for its logo and don’t need employees).

Now for the important piece of the conversation: What’s the best way to set up an options plan vis-à-vis acceleration? The idea behind double trigger acceleration is that as we saw in our bootstrap example, there are lots of interested parties that don’t particularly care for full single trigger acceleration. It is very employee friendly BUT not necessarily equitable and your investors will very likely raise their hands at every board meeting and ask if you’ve come to your senses yet if you’ve started your plan with full single trigger acceleration. We’ll see another reason to dislike it in a minute. So, along comes double trigger acceleration in which we seem to be creating a more ‘fair’ plan because partial acceleration makes the shareholders happy and the employees who’ve worked there for a couple years get a bigger piece than the guy who started Tuesday, while also providing additional consideration to any and all employees who aren’t offered jobs after the acquisition.

Here’s how I feel about all this, from number of options granted to acceleration: I’m for partial single trigger acceleration on acquisition (with no special exemptions for employees with super powers) AND an options grant program that objectively matches role and title to size of grant consistently across the organization. (eg, all senior engineers get 4 options, all executive team hires get eleventy-eleven options, you get the picture).

Why? Because any other approach misaligns interests and motivations. I know of one company (not one I started or worked for) that had full single trigger acceleration and the people at this company STILL hate the head of sales that got hired one month before an acquisition and made more than the hundreds of people who’d worked there for three years. Double trigger? Now you’ve got people who might WANT to get terminated if there’s an acquisition. Subjectively granting options quantities based on whatever the criteria of the day is? Always a bad idea and bound to end in tragedy and you regretting your whimsical approach to options grants.

So, at this point the astute reader thinks “this is all well and good, but you can just as easily have some employees who really take a bath if they’ve just left a very nice and respectable job to come work for you, then get terminated on acquisition a month later, and only get partial single trigger acceleration”. This is true. The answer is hey, they get partially accelerated, and I’d rather have generally equitable distribution of the deal. If you’ve got a reasonable Board of Directors, you can accommodate anomalies with performance bonuses or severance or whatnot instead of being locked into a plan with misaligned interests.

There’s another hidden issue with full single trigger acceleration that I mentioned earlier, and we can call this the “acquirer’s not stupid” rule. If your employees all fully vest on acquisition, how do you think the acquirer is feeling about your team’s general motivation level post-acquisition? They are not feeling good about it. No they are not. They are thinking “gee, we are going to have to re-incent all these folks and that’s going to cost a bunch of money, and you know where that money’s going to come from? I think we will just subtract it from the purchase price, that’s what we will do!”….so the shareholders get doubly-whacked…they get fully diluted to the total allocated options pool AND they likely take a hit on total consideration as the acquirer has to allocate value to re-upping the team.

My FeedBurner cofounders and I have done our options plans a bunch of different ways across a few different companies, even changing midstream once, and I think partial single trigger acceleration causes the least headaches for everybody involved in the equation (although it obviously provides less potential windfall for more recent hires).

NB: you should be very very clear when you hire people about how this works. Most employees, to say nothing of most founders, don’t really understand all the nuances in an options plan, and it’s always best to minimize surprises later on.

You want to sort as much of this out up front with your attorneys before you start hiring people. You want to avoid having “the old plan with X and the new plan with Y” and that sort of thing.

Thanks for the note, Bernie!

#MBA Mondays

Comments (Archived):

  1. jrh

    Two more things to consider:1) Different kinds of employees have different incentives. Some employees are directly involved in making the acquisition happen, and may be very unlikely to be kept on afterward. (E.g., a VP of bizdev with an early stage focus, who made the first contact with the acquirer and helps manage the relationship.) They should have bigger incentives to make the merger happen.2) The acquirer can increase the option pool and rearrange it to suit their needs. Especially when the acquisition price is low, the acquirer can proportionally bump up the option pool. If key employees are p.o.’ed about the equity of vesting, then a smart acquirer will fix the problem.

  2. Rick Bullotta

    Fred, we’ve generally left any acceleration of vesting to “board approval” rather than creating any specific policy in advance, due to the umpteen different situations that could possibly occur on any exit. Occasionally a few key hires have asked for (and we have sometimes agreed to) explicit acceleration terms, but I think it is always a good idea to preserve flexibility and leverage by leaving it to board discretion. Do you see any downside/risk to that approach?

    1. Reid Curley

      Changing options provisions at the time of a deal can potentially create issues around compensation expense for cheap stock and perhaps also IRS 409A issues. Expert counsel is definitely recommended. My guess is that it further complicates discussions around an exit, a time when you have plenty of other things to worry about.Edit: Should also add that qualification for ISO treatment can be affected too.

      1. JLM

        It is difficult to imagine a scenario in which properly granted ISOs would become anything else when only the vesting provisions are changed as long as the authority to alter vesting arrangements was fully disclosed and granted in the original plan.Am I missing something?I can see a problem when they are exercised if they are exercised in amounts in excess of $100K annually but I would have to know some more specifics on the particular deal to assess this problem.

        1. Reid Curley

          You are probably right as far as ISO treatment in the event that acceleration is the term that is being changed. I should have said that ISO treatment is one thing, among many others, that could be affected depending on the nature of the changes proposed. Even then, I think accounting/tax issues would take a back seat to economic and emotional ones. I was trying to make a more general point that I think it is a bad idea to set expectations that changes to option provisions may be “considered” when a deal is imminent.”You mean I worked my tail off for two years, and this company would not have been successful without me, but you are not going to accelerate the remaining 50% of my options because you don’t have to?””That’s right. Thanks for doing an excellent job.”I’ve seen that movie before.

          1. JLM

            Yes and therein intellectually lies the dilemma.If I think it will take 4 years to get to the pay window and I attract some talent to get us there by luring them with promises of future riches, then sure I could be convinced that we have just “accelerated” the time line; and, therefore, why not accelerate everything that would have otherwise been on the table given the original plan. Oh, yeah, including the vesting of all stock options.On the other hand, a deal is a deal and having negotiated with folks wherein the deal is a balance between talent for comp, I can certainly see why an employer would simply demand the letter of the law. And, maybe, the CEO actually has a fiduciary obligation to ensure that the shareholders get exactly what they are entitled to. The CEO does not have the right to be generous w/ someone else’s money.One of the toughest things in life is to put yourself back in the instant in time when you originally made the deal and try to do what you would have done absent any negotiating leverage or power. It becomes much easier when you have done it a few times.

    2. JLM

      The natural conflict between Boards/VCs and employees holding stock options are real, material (certainly to the employee) and legally troublesome.Employees are going to obviously want to get paid and if they are sophisticated they are going to bring up the point that the entire option pool was likely accounted for when the money came into the company from the latest and prior funding rounds.There is something inherently troubling when the “new” money accounts for the dilution impact of options on a pooled fully vested basis going in and then wants to pay something less than what they bargained for on the way out.Not to say there is anything inherently fraudulent as long as it is written correctly but if the option pool is not fully vested (the assumption made at the time of the investment) why should the investors effectively ratchet up their returns when fiction becomes reality?Small point to some. Big point to others.

      1. ErikSchwartz

        This particular issue has been a burr under my saddle for a while.The options pool comes from the founders. Unused options are distributed pro-rata amongst all share holders. With a big option pool and a quick exit that could be quite significant money.

        1. JLM

          I think that astute founders who are bringing in new money should be perfectly willing to negotiate for the proposition that if unused options exist at the time of the exit, they revert to the original grantors.They damn sure do not belong to the new investors.

        2. fredwilson

          not all options come from founders. if they are in the pre-money, they do. but that is often just the first year or so of options. after that they come out of everyone’s hide

          1. JLM


          2. ErikSchwartz


    3. fredwilson

      yes, you will be in paincutting up the pie is so much harder when you know exactly what the pie is worth

  3. William Mougayar

    Wow Great coverage of all the corner cases. I wished all lawyers understood this as such. v

  4. Reid Curley

    “Full acceleration dilutes the shareholders 15%, whereas partial acceleration only dilutes the shareholders…well, partially.”Of course, when making an investment, investors insist on counting the entire option pool in order to calculate their share price because they “have to account for that dilution.” Then they don’t want to accelerate in the event of a change of control because it would mean they would have to take the dilution that they have already accounted for. They want their cake AND want to eat it too? I am shocked. Shocked.This is not to say that there are not good arguments against single-trigger acceleration (as pointed out in the article). Only that this is not the strongest one.

    1. fredwilson

      reid – the deal with the option holders is that you put in four years and you get your ownership interest. that’s what the investors are counting on. not something else.now acceleration provisions exist and smart investors understand why they matter but to suggest that employees are due their full equity stake for less than four years service is simply wrong

      1. Reid Curley

        I don’t disagree with you on those points Fred. I do think that there should be a vesting period, and I don’t think that there should be a single trigger in most cases.I do not, however, believe that the dilution argument is appropriate when the dilutive effect of the full option pool is taken into account at the time of the investment.

      2. Rob K

        Fred- I think the point he is making is still valid. The share price of the round assumed 100% of the option pool is granted and vested, not something less, or some “weighted average” if some of them don’t get granted/vested.

        1. JLM

          Of course, the way to rectify that matter is to return the unvested options in the pool to the original grantors of those options — likely the founders.

          1. fredwilson

            the founders are not the likely grantors of those options if the company has done multiple roundsearly stage investors, like me, take a lot of option dilution along the way

      3. JLM

        But if the intellectual basis for the deal was — if everybody pulls on the rope in the same direction, then in about four years we all go to the pay window?I can argue that the time line was simply compressed if in year 2 you are standing at the pay window.Why not put everybody in the same place they expected to be when the pay window opened? In 4 years or 2 years.This is the difference between temporal vesting and conditional or performance based vesting. A concept used routinely in employment contracts as the basis for short and long term bonus arrangements.I can argue either side equally well and find no fault w/ anyone who takes either side.One might be tempted to put one’s thumb on the scales if the option pool was already priced in. As this clearly implies a complete disregard for vesting issues.

  5. Dave Pinsen

    Fred is setting a positive example for Jets fans everywhere in getting on with business as usual after last night’s loss.

    1. fredwilson

      my 15 year old son is deeply depressed this morning, as only a 15 year who could not imagine losing could beon the cusp of my 50th year, i’ve become immune to disappointments as a sports fanprobably because i root for the Jets, Mets, and Knicks

      1. ErikSchwartz

        Jets did the same thing the Pats did the week before. Spent 8 minutes in the 4th quarter on a drive with no urgency while down by 14 and came away with zero points. Steelers let them come down the middle but not get out of bounds and the clock kept running.

        1. fredwilson

          after that awesome run to the 2 by shonny greene, we should have given him the ball four times to get it in. he was pissed off after taking a helmet to the head and was full of fire and brimstone. how could rex ryan not see that?

      2. kidmercury

        at least you’re not a bears fan…..lol did you see the beatdown cutler caught on twitter….embarrassing

      3. bsiscovick

        i root for the seahawks, mariners and the team formerly known as the sonics. i fell your pain daily.

      4. Mark Essel

        I gave up on rooting for favorite teams, way too far out of my influence or reward zone. It’s just a psychological association trick when a regional or favorite team wins.But I sacrifice the peak joy of victory with my emotional sports armor.

      5. RichardF

        I will never be immune from England beating Wales in any rugby tournament (but particularly the Six Nations)this is minority nation comment 🙂

        1. Peter Beddows

          Right with you on that. And I miss the old Cardiff Arms Park

          1. RichardF

            I agree Peter, the atmosphere is just is not the same, although I don’t miss standing on the east terrace 😉

      6. ShanaC

        You are better than my dad, he gave up on the Red Socks permanently (and stopped watching sports) the year I was born….

        1. Dale Allyn

          Raising kids can be like watching sports. 😉

          1. ShanaC

            How is raising kids like watching sports – beyond that you root for your kids

          2. Dale Allyn

            ShanaC, I was just being silly and referring to the tug-o-wars and rugby-like matches that often occur between siblings and/or classmates, etc. 🙂

      7. Dave Pinsen

        I can imagine how your son feels. When I was 15 and my team lost, I was depressed too.But for some age doesn’t soften the blow — in Howard Lindzon’s recent interview with him, Mark Cuban mentioned that when the Mavericks lost the NBA championship, he didn’t leave his house for two weeks (of course, he also owns the team, so that raises the stakes).

      8. Peter Beddows

        Classic example of hedging ones bets!

  6. ErikSchwartz

    Great article.Are you sure the names were changed? I know a “Schmucky in Biz Dev”.

    1. fredwilson

      and i know a bobby joe in sales

  7. JLM

    It is interesting to read this blog post and take the temperature of its tenor. In some ways it is quite thought provoking and perhaps even a bit troubling.First and foremost, options are securities and the holders of options must be treated with the same care and fiduciary obligations as any shareholder. Not just a duty of fair play but one of support, championing and communication. And documentation. And full disclosure.Board members have a fiduciary obligation to represent the interests of ALL shareholders — not just their own investment. Their own investment is likely subsumed in that definition as they too are shareholders — but perhaps of different securities. And securities which may by their very design create conflicts which are obvious and apparent.Board members cannot negotiate for “their” own benefit at the expense of any other shareholder or security holder.This is a classic conflict of interest and the only honorable and legal ways out are to recuse oneself or to form a subcommittee of the Board which does not contain these conflicts or to maximize the return to the other parties. Simply getting a fairness opinion is really not sufficient.This conflict is made all the worse by the likelihood that the investments made by the VCs who now constitute all, a majority of or part of the Board likely accounted for the full dilutive impact of any existing options or option pools — down to the penny — in the calculus of their original investment.Having said this there are a great number of folks who deal with these issues in a fair and honorable manner and leave no scars or bruises. It can certainly be done but it takes some doing.

    1. fredwilson

      the reason that most situations are managed fairly is that reputation matters more than anythingi have consistently and regularly done things that are not in my economic interests in order to do what is right and fair

    2. ShanaC

      yes I was thinking this too – depending on the structure of the option package, it is totally possible that over time said employees could develop voting rights

  8. Dale Allyn

    Very timely discussion. Thanks Fred.

  9. Jeff Dachis

    I think it is important to note that despite best intentions regarding the structuring of options acceleration, these are all pieces in one big puzzle and the terms all work together to create a picture. Liquidation preference of any preferred shareholders could wipe out any potential benefit of carefully negotiated options acceleration plans for the common with single or double trigger… What someone thought they were getting turns to nothing if the sale price of the company doesn’t clear the preference hurdle…. Just more to think about in context.

    1. fredwilson

      in that situation you need to take care of the founders and management in some equitable way or there will be no exit

      1. Jeff Dachis


  10. adityac

    So, who gets the remaining unvested options at the time of acquisition? Assume the founders+investors own 80% in equity, and the option pool is 20% with 15% vested (single trigger on acquisition) – what happens to the last 5%? Does that go back to the founders+investors?

    1. fredwilson

      goes back to everyone pro-rata

  11. chris dixon

    I think all employees should have double trigger. Seems totally unfair that after working for years someone can just be fired a day after acquisition and lose the rest of their equity. This argument “Double trigger? Now you’ve got people who might WANT to get terminated if there’s an acquisition” is covered by “good reason” clauses.

    1. secorp

      Can you give a couple examples of “good reason” clauses that help address this issue of potential desire to be terminated? I’ve seen that exact situation arise a few times now, and the way that seems to most successfully address it is to not use double triggers, but I’d be very interested in more options.

  12. John Hinnegan

    Thanks for the post. Very informative, and well, probably as clear and concise an explanation as I’ve ever seen on the subject.Do you have a different opinion on founders’ equity vesting vs employees’?

    1. fredwilson

      i think founders’ vesting should accelerate more than employees

  13. Andy Zhao

    How about event trigger will void one year cliff clause and accelerate unvested options in the amount based on certain percentage of vested options? This seems to be fair – reward solely based on how many years an employee has worked for the company.

    1. fredwilson

      both are good suggestions

  14. Andy

    Very cool, I am really enjoying the MBA monday posts. Keep up the good work.

  15. ShanaC

    I’m going to assume for the option grant in his method, we should refer back to the posts about employee equity in general and how to calculate how much equity to give?

    1. fredwilson


  16. Casey

    I wonder if I could ask for a quick bit of advice: My aspiration is to get on the staff of a VC firm; however I haven’t exactly taken the typical path. I have an MBA but not from a top school, I also just finished my MS in Finance from Robinson @ Georgia State and I have been an entrepreneur or involved in many start-ups. I just can’t seem to get the attention of any VC’s. Any advice?

    1. fredwilson

      go work at a VC backed company in a position with visibility to the VCs

  17. paramendra

    Wow, that was a mouthful.

  18. zach shulman

    Fred, nice post. i am a VC and former corp lawyer. one issue that has always puzzled me is the so called double trigger where say 50% of unvested options vest on the CoC and then the other 50% vest on termination within a year after the CoC. it is the “within a year after the CoC” that I find impossible to implement. The target company is long gone, consideration for the CoC is paid out to SHs (including option holders that exercised). How can the springing double trigger work in the case where the option holder is terminated say (without cause) 7 months after the CoC? Any thoughts (except to “avoid this provision”)?

    1. fredwilson

      usually you hold back an amount equal to the unvested equity

  19. JohnnyMac

    Fred – great post but when is the last time you’ve seen a venture board member without a single trigger / full acceleration clause in their BOD offer letter? I think it is rare. Even with a double trigger, the probability of the clause being fully triggered for a Director during an acquisition is very high.Makes it a little hard to understand your double trigger/partial acceleration approach as optimal for the employees and management teams who executed the plan that put the company into a liquidity event.Lots of double standards out there.

    1. fredwilson

      venture board members don’t get optionswe’ve done almost 40 deals at USV and have never been issued optionswe wouldn’t even think of taking them

  20. ian_peterscampbell

    This is mostly great, but I’m confused on one point. How can options not forward vesting simultaneously prevent dilution, while also remaining as incentive for options holders continuing to work at the acquiring firm?If unvested employees carry their unvested options forward as incentive, presumably converted to options in the acquirer, then that’s a cost the acquirer has to bear. Presumably those incentive packages will be subtracted from the purchase price, which is going to come out to be the same as the dilution?If on the other hand employee options revert in order to prevent dilution, then presumably employees no longer hold options and the acquiring company has to re-incent.What am I missing?

    1. fredwilson

      it isn’t always subtracted from the purchase price

  21. fredwilson

    yes, you are correct