If you are a “C-level” executive, one of the most important parts of your compensation package is the equity position that you gained when you were hired. If you had an attorney assist you in negotiating your employment contract, your equity compensation is likely structured for you to obtain maximum gain and tax-favorable income when the company is significantly profitable.
Many executives are uncertain about what happens to their equity position when their employment is terminated, or they otherwise separate from the company. What if your company is acquired by a new entity and your position is being filled by a new person? What if you are offered a better job by a competitor? Whether the decision to part from the company is within your control or not, you have contributed to the company’s success and you do not want to miss out on the payout from the equity position you earned. Your share of the company’s profit is a critical part of your compensation and it is important to your financial future.
Many executives receive incentives in the form of stock options, restricted stock, qualified stock options or other types of shares or interests. These valuable assets are often put aside, however, when it comes to negotiating base salary. This is particularly true in the severance provisions of an employment contract. Most severance discussions focus on how long the severance pay will last, with little or no discussion regarding equity.
If you are negotiating an employment contract, discuss your options on how to address your equity in severance terms with your attorney. For instance, if you are being offered 6 months’ severance pay, you should also negotiate 6 months acceleration on the vesting of your equity. Also, be sure that the acceleration of vesting occurs for both voluntary terminations for “good cause” and for involuntary terminations “without cause.”
If your employer is involved in a merger or acquisition, you may be offered a retention agreement. Again, negotiation regarding your equity in severance should be included. For example, you will want to seek a single trigger for your cash out (instead of a double trigger). If you are terminated before the change of control, you should also request executive claw back terms, which allows you to obtain a portion of the benefit of the appreciation had you not been terminated. Finally, your attorney will seek protection against the application of an excise tax on parachute payments.
If you failed to negotiate equity at severance in your employment contract or retention agreement, you may have a final opportunity at termination. Depending upon your bargaining power at severance, you may have the ability to negotiate the key terms regarding your equity position. Examples of leverage you have at termination are legal claims you have against your company, the company’s need of post-termination services to aid in the transition, or your agreement to sign other post-termination documents.
Equity is an extremely valuable part of your executive compensation package. Whether you need assistance negotiating it in an employment contract, retention agreement or at termination, Mailly Law can help. We will increase your bargaining power and help ensure that you obtain the compensation and benefits you deserve. Contact our office today to schedule your consultation.