Negotiating Employment Agreements for High-Level Executives: A Comprehensive Guide
Importance of a Well-Drafted Employment Agreement
A clearly drafted Employment Agreement is essential for outlining the obligations and expectations of both the company and the employee. It serves as a roadmap for the employment relationship, minimizing the risk of future disputes. For high-level executives, such as CEOs and CFOs, negotiating these agreements can be particularly complex, which is why experienced employment law attorneys are often involved. This guide provides a detailed checklist of key issues to consider when negotiating employment agreements, ensuring that both parties are aligned and protected.
Compensation and Equity
Compensation is one of the most critical aspects of an Employment Agreement. It goes beyond base salary and includes several layers of negotiation. For instance, the agreement should specify whether the base salary increases annually or remains static. Signing bonuses are also common, especially if the executive is leaving a previous position where they may forfeit stock options or other benefits. Bonus structures, whether quarterly or annual, should be clearly defined—indicating whether they are guaranteed, performance-based, or discretionary. Additionally, the agreement should outline under what circumstances the base salary can be reduced, such as during financial distress, and by what percentage.
Equity grants are another pivotal component. The type of equity—whether incentive stock options, non-qualified stock options, stock appreciation rights, or restricted stock units—must be determined. The exercise price, vesting period, and the percentage of equity granted are also key considerations. A typical vesting period is four years, with a one-year cliff vest, meaning the executive must remain employed for at least a year for any portion of the equity to vest. Post-termination, the agreement should specify how long the executive has to exercise options, typically ranging from 90 days, and whether vesting accelerates in the event of termination without cause or during an acquisition.
Scope of Employment and Responsibilities
The scope of employment and the responsibilities of the executive are central to the agreement. The title of the role, the specific duties, and any limitations on changes to the executive’s responsibilities should be clearly outlined. For example, the agreement should address whether the executive can be demoted or whether their responsibilities can be substantially altered. Additionally, the agreement may guarantee a seat on the Board of Directors while the executive is employed.
Location and relocation are also important factors. The agreement should specify the place of employment and whether the company can unilaterally relocate the executive or if relocation requires mutual consent. Lastly, the agreement should address whether the executive is allowed to engage in external activities, such as serving on other Boards or participating in community organizations.
Benefits and Perks
Employee benefits are a significant aspect of the employment package. The agreement should detail which company benefit plans the executive is entitled to, such as health insurance, disability coverage, 401(k) plans, and stock options. It should also specify whether the company covers the cost of these benefits entirely or shares the burden with the executive. Vacation entitlements, including the number of days per year, accrual policies, and payment for unused vacation upon termination, should be clearly stated.
Other special arrangements, such as loans or forgiveness agreements, should also be included. Additionally, the agreement should address whether any benefits are taxable to the executive and whether the company will reimburse the executive for these taxes.
Term and Termination
The term of employment, whether fixed or "at will," is a critical provision. The agreement should outline the grounds for termination, including "for cause" circumstances such as felony convictions, material breaches of the agreement, or unauthorized disclosure of confidential information. If the executive is terminated without cause, the agreement should specify severance pay, whether it is a lump sum or paid over time, and whether the company will continue to pay for benefits or cover COBRA costs for a certain period.
Executives often negotiate for a mutual release of liability in exchange for severance payments, ensuring that neither party can pursue legal claims against the other. The agreement should also define what constitutes a disability or death and the corresponding consequences, such as continued salary and benefits for the executive or their dependents.
Legal and Protective Provisions
Legal and protective provisions are essential to safeguard both the executive and the company. These include liability protection mechanisms, such as Directors and Officers (D&O) insurance, indemnification clauses in the company’s bylaws, and provisions in the corporate charter limiting the liability of executives. Indemnification agreements should protect the executive for actions taken within the scope of employment, including legal expenses and continued protection even after the executive leaves the company.
Confidentiality restrictions are another key aspect. The agreement should outline what constitutes confidential information and exclude publicly known information or data obtained from third parties. It should also specify the duration of these restrictions. Additionally, the agreement should address invention assignment, ensuring that the company owns any inventions or ideas developed by the executive during employment, while complying with applicable laws.
Post-Employment Limitations and Dispute Resolution
Post-employment limitations often include non-solicitation and non-compete clauses. These provisions restrict the executive from soliciting company employees or competing with the company for a specified period and within certain geographic regions. However, executives typically resist such clauses, as they can limit future career opportunities. The enforceability of these clauses varies by jurisdiction, with some states like California generally prohibiting non-compete agreements.
Dispute resolution provisions are also crucial. Many agreements require confidential binding arbitration as the exclusive method for resolving disputes, which can benefit both parties by avoiding public litigation. The agreement should specify the venue for arbitration or litigation and the governing law.
Other key considerations include "golden parachute" provisions, which provide payment or benefits to the executive in the event of a change in company control, such as a takeover. These provisions often include tax implications and whether the company will "gross up" the payment to cover taxes. Additionally, the agreement should address miscellaneous clauses, such as attorneys’ fees for the prevailing party in a dispute and a statement that the agreement supersedes all prior understandings.
In summary, a well-drafted Employment Agreement is indispensable for defining the relationship between the company and the executive. By addressing compensation, equity, responsibilities, benefits, termination, legal protections, and post-employment limitations, the agreement ensures clarity and minimizes the risk of disputes. Both parties benefit from a transparent and comprehensive contract that aligns their interests and protects their rights.
