Negotiating employment opportunities should be exciting and challenging. Both parties want to win and, ideally, to win together and for the foreseeable future. An employment agreement should state the common goals and expectations in a clear, concise and complete manner. A good legal advisor should assist the executive with skill, tact and focus.
There are thousand questions that could be asked, and ten thousand suitable answers, but this this article is the third in series of three articles that identify and explore a few common and critical areas.
Part 3: What happens if the world changes? – death, disability and divorce (corporate not personal)
No one wants to talk about an ending when the journey is just beginning, especially an ending that does not fall into the happily ever after category. Smart executives engage smart lawyers. A good legal advisor will make sure the areas are covered, the client understands the scenarios and contract does not getting mired in a never ending series of “what if” questions.
The “what if” questions that need to be asked and answered include “what if I die?”, “what if I become disabled and what does that even mean?”, “what if there is a change of control?” and “what if there is an early termination of employment?”.
Again, the importance of each of those questions might hinge on whether the executive started on a “future is bright and it’s near” note or a “this is a marathon and I need time” premise. As importantly, the underlying compensation package, and how much deferred or contingent equity is involved, has to be considered when negotiating these provisions.
For the most part, death and disability can be handled through insurance products. In the death scenario, the decedent’s heirs should receive a fair cash payment for the equity held by the decedent. Privately held companies wisely avoid situations where heirs suddenly own equity. The employment agreement should focus the fair valuation of the equity at issue and the obligation to pay the heirs promptly.
To restate the obvious -disability is not as clear cut as death. And suitable disability insurance products are not as ubiquitous as life insurance. Disability insurance products that cover equity positions can be complex and difficult to obtain. The employment agreement should be clear as to what disability means and how is it determined, for example, by a personal or company physician or neutral third party. How much time is required before a temporary setback becomes a permanent disability. And if a permanent disability occurs, what happens to vested and unvested equity? A good legal advisor can assist his or her client in understanding the issues and analyzing the risk.
A change of control can trigger all sorts of results for private companies and their employees, especially where employees hold, or have the right to acquire, equity. Often, vesting of options and other contingent forms of equity is accelerated. Such an acceleration should be clear in the employment agreement, the equity award agreement or the equity plan. The executive and his or her legal advisor should discuss exactly how the acceleration will work and the possible tax consequences. A common situation occurs where the executive continues with the successor or surviving company, and perhaps the vesting continues as well. The “what if” answer should address “double trigger” situations where employment and vesting are designed to continue and then a few months later, the executive is unceremoniously shown the door.
Finally, employment agreements should always discuss terminations that are voluntary, with good reason or for good cause. Each event might have very different consequences, especially in terms of severance and equity, but also in terms of post employment restrictive covenants such as non competes and non solicitations. Executives should work closely with their legal advisors to ensure that “cause” and similar terms are clearly defined, that proper cure and notice periods are provided, and that opportunities to discuss matters with the board of directors might be available. Armed with very clear and concise definitions, the parties will understand the landscape and can move forward with the honeymoon.
The information in this article is for informational purposes only and does not constitute formal, legal advice. If you have any questions regarding the information contained in this article, please consult with Catherine McGivney at 312.251.2260 or any attorney at RM Partners Law LLC for advice about your particular circumstance. © 2019 All rights reserved