An Introduction to Stock & Options for the Tech Entrepreneur or Startup Employee

> Is it possible (or realistic) to make an arrangement that in the event of an acquisition or liquidity event that your stock becomes full vested?

Note that the reverse is also possible: A change-of-control which restarts the vesting clock.

Acceleration usually comes as single-trigger or double-trigger.

Single-trigger is what you are talking about: when all of your options vest immediately upon acquisition. It could be argued that this is unfair to those that have worked their full time to earn their full options grant. Usually, in this arrangement, a certain percentage of your shares are subject to the trigger (so, 25% vest immediately, for example). I think it would be unusual for 100% of your options to vest immediately upon acquisition: what if you were acquired a month after you joined?

The second type is double-trigger. Let's say that you have 75% of your options unvested in an acquisition, and you have 3 years remaining to vest at the new company. If they fire you, you lose the rest of your options. Double-trigger acceleration is where your options vest immediately if you are not fired "for cause". That means that, as long as you are not being grossly negligent at your job, the new company can't screw you out of your unvested options by laying you off.

The one thing to remember here, is that a lot of this is subject to your leverage over the company and the leverage the company has with its new acquirer. All of these terms are subject to renegotiation in an acquisition, and anything could change at any time -- look at what happened with Zynga.

Consider it a gentleman's agreement, for the most part. Good people will honor it, shitty people might try to screw you. As with anything, you should only do business with those you trust.

And finally, the absolute best way to make sure you get the full value of your options (as an employee or a founder) is to always make sure you are indispensable to the company. A company who needs you can't screw you.

(final note: IANAL, this is my understanding of how things work)

Do you mean bank debt or VC-style hybrid debt?

No bank in their right mind would give millions of dollars to a "coder" with a "great" idea.

A bank (or any rational debt holder) has little interest in upside. Their interest is capital protection and repayment.

Debt is typically divided between "asset lends" and "cash-flow lends". You can get serious leverage with an asset lend, maybe 80% of equity, but that assumes you have assets (less debt) as colateral. So if you want $3m, you need at least $3m in equity.

As for cash flow lends, rational debt providers won't go anywhere near even 5 times for an unstable/unproven company. 5 times what? Usually some proprietary measure of earnings (EBIT, EBITDA, EBITDA-C, NPAT, cash flow, etc, adjusted for whatever the bank decides). So for $3m, you usually need $1m in cash-flow already. Even then, you have to deal with monthly or quarterly debt covenant reporting.

Most businesses who qualify for cash flow lends are relatively solid. That's because the covenants are restrictive (and especially frightening for an inconsistent business). A 5% drop in revenue can filter down to a serious drop in the proprietary cash-flow calculation and have the bank calling its capital the next day.

Compare that to a VC scenario. Imagine you've burnt through $3m, sales have dropped, then the bank calls the entire $3m loan. Maybe in the US that stuff flies, but in most responsible financial markets, that means you're toast for 5-7 years. You won't even get a mobile phone contract in some countries.

Of course there are business suited to traditional debt, but I can't imagine the typical HN reader would look for serious capital from credit institutions, unless of course they made serious money and they couldn't get VC for market size reasons.

I do not know what the technicalities are for bank debt, but it seems that VC money is easier to get, but has one million little hooks. With debt there aren't usually hooks. You pay a fixed interest rate.

Shameless plug: I work at truequity (http://www.truequity.com) where we provide a subscription based product, for start-ups, to manage stocks & options. I think it really helps founders understand what happens to their company when investors come in.