Understanding Equity Re-Vesting: A Guide for Employees

Re-vesting is a critical concept in equity compensation that often arises during mergers, acquisitions, and corporate restructuring. This guide explains what re-vesting is, how it affects employees, and strategies for navigating re-vesting situations effectively.

What Is Re-Vesting?

Re-vesting occurs when previously vested or unvested equity is subject to a new vesting schedule. This process essentially "resets the clock" on equity ownership, requiring employees to earn their equity again over a new time period. Re-vesting is most commonly encountered during:

• Company acquisitions
• Mergers
• Corporate restructuring
• Management buyouts
• New funding rounds

Common Re-Vesting Scenarios

Acquisition Re-Vesting: When a company is acquired, the acquiring company often implements re-vesting to retain key employees:

Example Scenario: An employee has 1,000 RSUs that vested over four years, with 750 units already vested. The company is acquired, and the acquirer implements a new two-year re-vesting schedule. The employee's 750 vested shares are converted to acquiring company stock but are subject to new vesting terms:

• Year 1: 50% of converted shares re-vest
• Year 2: Remaining 50% re-vest
• Unvested shares typically follow a new schedule or are cashed out

Restructuring Re-Vesting: During corporate restructuring, companies might implement re-vesting to ensure key talent retention:

Example Scenario: A startup pivots its business model and raises new funding. Existing employee equity is restructured with:

• 25% of previously vested shares remaining fully vested
• 75% subject to a new three-year re-vesting schedule
• New equity grants added on top of existing equity

Impact on Different Types of Equity

Stock Options: Re-vesting affects stock options in several ways:

• Exercise windows may be reset or modified
• Strike prices might be adjusted
• New option grants may replace or supplement existing ones

Example: An employee has 5,000 vested options with a $5 strike price. After acquisition:

• Options are converted to acquiring company stock at a predetermined ratio
• New vesting schedule applies to converted options
• Exercise window might be extended or shortened

Restricted Stock Units (RSUs): RSU re-vesting typically involves:

• Conversion of existing RSUs to acquiring company stock
• Application of new vesting schedules
• Potential acceleration of some units

Example: An employee holds 2,000 RSUs, 1,500 vested:

• 1,500 vested RSUs convert to acquiring company stock
• New one-year re-vesting applies to converted shares
• 500 unvested RSUs either cash out or convert with new terms

Key Considerations for Employees

Financial Planning: When facing re-vesting, consider:

• Cash flow implications during new vesting period
• Tax consequences of any accelerated vesting
• Impact on long-term financial goals
• Need for diversification strategies

Career Planning: Re-vesting affects career decisions:

• Length of commitment required for full vesting
• Opportunity costs of staying versus leaving
• Career growth opportunities in new structure
• Impact on total compensation package

Negotiation Opportunities: Areas potentially open for negotiation:

• Percentage of equity subject to re-vesting
• Length of new vesting schedule
• Acceleration provisions
• Additional equity grants

Negotiating Re-Vesting Terms

Preparation Strategies: Before negotiations:

• Document your current equity position
• Research industry standard re-vesting terms
• Understand your value to the organization
• Prepare alternative proposals

Common Negotiation Points

Vesting Schedule

• Shorter re-vesting periods
• Larger initial vesting tranches
• More frequent vesting intervals

Acceleration Provisions

• Single-trigger acceleration
• Double-trigger acceleration
• Partial acceleration

Protection Clauses

• Good-leaver provisions
• Change-in-control protections
• Severance tie-ins

Best Practices During Re-Vesting

Documentation: Maintain detailed records of:

• Original equity agreements
• Re-vesting terms and conditions
• Communications regarding changes
• Vesting milestone dates

Performance Management

• Document your contributions and achievements
• Maintain strong relationships with new management
• Stay aligned with post-transaction objectives
• Build relationships in acquiring organization

Risk Management

• Diversify investments where possible
• Understand new company's business model and prospects
• Keep skills updated and marketable
• Maintain professional networks

Special Considerations

Tax Implications: Re-vesting can trigger various tax events:

• Potential acceleration of income recognition
• Changes in tax basis
• New holding period requirements
• International tax complications

Legal Protections: Consider securing:

• Legal review of new agreements
• Understanding of state law implications
• Review of non-compete and other restrictions
• Documentation of any verbal promises

Re-vesting is a complex but increasingly common aspect of equity compensation. Success in navigating re-vesting situations requires careful planning, clear understanding of terms, and strategic negotiation. By staying informed and proactive, employees can better protect their interests and maximize the value of their equity compensation through transitions.