Employment Contracts: Negotiations and Coaching
The following is a checklist of key issues to consider when negotiating an employment agreement.
To help you to look objectively at this list, we refer to the executive to be hired in the third-person as the "person".
Being on Par with the Executives
Is this person receiving the benefits, bonus programs, insurance, and other terms of employment, being received by the so-called Executives?
Is this person promised the future benefits on par with future benefits that may be received?
- Is the employment “at will” which means that a change in employment terms, even a reduction in compensation, is permitted on a prospective basis, absent a binding agreement to the contrary. Or, how long is the employment term? Fixing the terms for a period of time, if compensation cannot be reduced and is guaranteed securely, is good, with caveats. But despite a multi-year term a contract can sometimes provide that the compensation can be reduced under specified conditions.
- Does base salary increase each year of the contract?
- Does the executive have the right to terminate unilaterally without incurring an obligation to provide comparable replacement services?
A “Golden Parachute” is a payment to or other benefit guaranteed to a company executive in the event the executive is fired as a result of a takeover of the company:
- In the event of a change of control of the company, is the employee entitled to terminate employment and receive the golden parachute payment?
- What are the tax implications of the golden parachute payment?
- Will the company also gross up the parachute payment to cover the tax?
- Will the company reimburse the employee's expenses in connection with an IRS audit claiming additional tax?
Negotiate about the initial base salary amount as much as it makes sense to do so. Watch out for any circumstances under which the employee's base salary could be reduced. Some agreements give the company the right to reduce base salary up to a certain percentage if other similar situated employee salaries are similarly reduced (such as might occur when the company is in financial distress). If there is a takeaway provision in bad times, then there should be a generous giveback and profitable reward in good times, yes? Bonus
Is the bonus guaranteed, dependent on achievement of milestones, or wholly discretionary with the Board of Directors? What provisions are made in case it is earned but cannot be paid by the employer in full due to financial insolvency?
Equity grants are often an important part of the Employment Agreement, and key issues here include:
- What percentage of equity grant is appropriate —
- a percentage of issued and outstanding stock or a percentage of fully diluted stock?
- Should the grant be
- tax advantaged incentive stock options,
- non-qualified stock options,
- stock appreciation rights, or
- restricted stock units?
- If stock options, what is the exercise price? Typically that needs to be equal to or greater than, and never to be less than, the fair market value of a share of common stock on the grant date.
- What is the vesting period for the equity grant? A typical scenario is 4-year vesting with a one year “cliff vest,” meaning the employee must be employed at least one year before one-quarter becomes vested on the anniversary of grant and monthly vesting at the rate of 1/48th of the total grant vesting monthly over the next 36 calendar months.
- If the employee is terminated without cause, does some portion of the equity grant get accelerated vesting?
- Is there any acceleration of options upon an acquisition of the company? Does it require an acquisition plus a termination of the employee's employment (a so-called “double trigger”)?
- How long does the employee have to exercise options after termination of employment? The typical period is 90 days. But this can vary depending on whether the termination is for cause, not for cause, or voluntary quitting by the employee to accept another job.
- Are the shares obtained upon exercise of an option subject to repurchase on termination of employment? If so, at what price?
- Are the shares obtained upon exercise of an option subject to a right of first refusal? If so, on what terms?
- Is there a signing bonus, especially if the employee would be losing options or other benefits for making the job switch?
- Are moving expenses to be reimbursed?
- Is there a relocation package available?
The various employee benefits available to an employee can raise a number of issues, including:
- Will the employee participate in all of the benefit plans of the company? Which of these plans should be in place for the employee?
- Are all of the payments for the benefits the responsibility of the company?
- (a) Health and medical (including spouse and dependent coverage)
- (b) Disability
- (c) 401(k)
- (d) Pension
- (e) Cafeteria Plan
- (f) Life insurance
- (g) Stock option/stock grant
- (h) Vision
- (i) Dental
- (j) Executive financial counseling
- How much vacation per year is the employee entitled to? Does unused vacation continue to accrue for the benefit of the employee and payable on termination of employment? How much accrued vacation can carry over to subsequent years?
- Any special loans or forgiveness arrangements? Are some of the benefits taxable to the employee? Should employee be reimbursed for the tax?
Death and Disability
Various issues arise on the death or disability of the employee:
- What is defined as a disability event?
- What happens on disability? Does the employee continue to retrieve salary and benefits for some period of time?
- What happens on death? Can medical and other benefits continue for some period for the spouse and children?
Reimbursement of Expenses
The issues regarding the right to the employee getting reimbursement expenses include:
- Will the employee's business expenses be reimbursed within a set time period?
- Is there a car or car allowance,
- cellular phone provided, or
- other such amenities?
- Are moving expenses to be reimbursed in the event of job-related relocation?
- Is there a relocation package available for employee in the event of job-related relocation?
Protection for the Employee
The employee may want to negotiate certain liability protection mechanisms, covering the employee performing services within the scope of employment:
- Does the company have Directors' and Officers' (“D&O”) insurance coverage?
- Do the company Bylaws provide for indemnification protection for officers and employees?
- Does the company's corporate charter limit the liability of officers?
- Is there an Indemnification Agreement that protects the employee, covering:
- (a) Indemnification protection for claims
- (b) Automatic advancement of legal expenses
- (c) Protection even if the employee is no longer employed by the company? (Note statutory limitations on indemnification.)
Scope of Employment
The scope of the employment and responsibilities raise a number of issues:
- What is the title of the employee's job?
- What are the employee's responsibilities?
- Can the employee be demoted? Can the employee's responsibilities be substantially modified, decreased, or increased?
- Is the employee guaranteed a seat on the Board of Directors while an employee?
- Where is the place of employment? Can the employee be relocated unilaterally to another city, or only with the employee's consent?
- Is the employee allowed to be involved in other activities (e.g., a directorship on other Boards, involvement in community activities)?
The employer will want confidentiality provisions in the Employment Agreement:
- Many companies have a separate form of employer Confidentiality and Invention Assignment Agreement that can be incorporated by reference. The employee must be careful not to use or divulge confidential information of a prior employer – the new employer will often want a covenant from the employee prohibiting such use or disclosure.
- If there are confidentiality restrictions on the employee, are the following excluded from the definition of “confidential information”?: (a) Information that is or was publicly known, or which becomes publicly known through no fault of employee. (b) Information that is or was obtained from a third party who had the right to disclose the information without restriction. (c) Information independently derived by the employee without reference to the confidential information. (d) Information that was already lawfully in employee's possession or knowledge prior to the disclosure of the confidential information.
- How long do the confidentiality restrictions last?
Does the employee have a right to terminate at any time upon giving written notice? What are the effects of a voluntary termination?
Under a contract for a specified term (as distinguished from a contract terminable at-will), does the company waive any claim of damage resulting from the future need to replace the person for the balance of the employment term after voluntary termination?
The circumstances when the employee's employment can be terminated and the resulting consequences will raise the following issues:
- What are the specific grounds on which the company can terminate the employee?
- (a) Conviction of a felony or any act involving moral turpitude;
- (b) Commission of any act of theft, fraud, dishonest or falsification of an employment record;
- (c) Breach of the employment agreement;
- (d) Failure to perform reasonable assigned duties; and
- (e) Improper disclosure of the company's confidential information
- What are the terms for notice and opportunity to cure?
- What are the terms concerning due process at the Board level?
- What are the terms, if any, for compensation in the event of early termination by the company?
- What is paid in the event of any termination, whether or not “for cause,” such as:
- COBRA notices (not benefits)
- Payment of accrued and unpaid vacation
- Be sure that indemnification rights shall survive termination
- Is employee entitled to severance pay on termination without cause? How much? Is it a lump sum or payable over time?
- If terminated without cause, is the company required to continue paying for benefits or COBRA benefits for some period of time?
- If employee is to receive a severance payment, the company may require the employee to sign a release of liability for the benefit of the company
- What is paid in the event of any termination, whether or not “for cause,” such as:
Companies expect that any inventions or business ideas developed by the employee related to the company's business during the employment period, will be owned by the company:
- What is the scope of the company's rights to the employee's development of new inventions, trade secrets, and ideas?
- Do the invention assignment provisions comply with applicable law?
The Employment Agreement can address various limitations on the employee post-termination of employment:
- Are there limitations on the employee soliciting company employees? For what period?
- Is there a covenant not to compete after termination of employment?
- (a) For what geographic regions?
- (b) For what period?
- (c) What is the scope of the covenant?
- (d) Are the restrictions enforceable under applicable law? (Generally not permitted in California.)
Most Employment Agreements have multiple provisions dealing with disputes between the company and the employee:
- How are disputes resolved?
- Should confidential binding arbitration be the exclusive way to resolve disputes?
- In what city must disputes be brought if litigated or arbitrated? What is the governing law?
Good employment agreements have a series of “miscellaneous” clauses including those that address these issues:
- Is there an attorney's fees clause where the prevailing party in a dispute would be entitled to recoup its attorneys' fees incurred?
- Does the employee represent and warrant that his resume and information provided to the company are correct and complete?
- Are all the terms of the employment reflected in the agreement, thus allowing a clause stating there are no other terms of the employment relationship?