Although it may seem pessimistic to plan for your departure from a company as you are accepting your new position, it is also the smart thing to do. When the stakes are high, planning ahead is always the smartest move.
A severance provision in your executive employment agreement sets forth whether you are employed on an at-will basis, which means the Board can terminate you at any time for any reason that is not prohibited by law. If you are not an employee at-will, then you have greater leverage when changes occur.
An executive often has the most leverage when initially negotiating his/her employment contract, so include severance terms that are as favorable to you as possible in your circumstances. If you are against significant competition for the job, you may want to hold-off and negotiate severance terms after you have proven yourself.
Why is it so important to negotiate severance terms? Without the terms of severance being in writing, an executive does not necessarily have the right to receive severance pay. You do not want to rely on the company’s goodwill if the Board decides to downsize, merge with another company, or close the company.
A severance package can be complicated because no two are identical. You should negotiate terms that are specific to your circumstances and your job position. Your severance payment may be a lump sum payment, or it may be payments made over a few months to a year or longer. Your severance package should consider your salary, equity and bonuses. In fact, a CEO’s severance package can be quite extensive!
Finally, an executive’s severance contract typically includes a non-compete clause. This provision must be reasonable in the limitations it places on you for finding new employment. Additionally, there may be a release of claims against the company, which means the executive agrees not to sue the company for discrimination, wrongful termination, or other similar claims. It is important to review this clause closely with your attorney to ensure you are not releasing rights to indemnification or similar officer and director insurance coverage if lawsuits arise after your departure.
If you have questions regarding employment contracts, severance agreements, retention agreements, or any other business matter, please contact Mailly Law.