In employment negotiations, equity awards are perhaps the most highly prized form of compensation. Equity’s primary attraction for most candidates is its potential for creation of significant wealth over time. For employers, what lures and motivates the best employees is surely in its best interests, too.

A. Risks Abound in Equity Compensation Awards
But risks abound in promises of equity awards. Here is a paragraph recently found in a job offer for a C-suite position that aptly illustrates just some of those risks:

“Coincident with [1] the Company’s recapitalization, the Company intends [2] to adopt an equity incentive plan [3] pursuant to which the Company will grant you 25,000 shares of its Class A [4] common stock. Upon the equity compensation plan adoption [5] the Company will recommend [6] to its Board of Directors that you be granted those shares with a fair market value [7] of no less than $250,000 on the date of the grant. The grant shall be subject to the terms and conditions [8] of the equity incentive plan and the standard [9] form of stock award agreement [10]. The vesting schedule [11] for the stock grant shall be as follows: 1/36 of the total number of shares will vest on a monthly basis, such that 100% of the shares will be vested on the three-year anniversary of your start date [12], subject to your continued employment [13] on each vesting date.”

In the lines above we find no less than 13 substantial risks of loss of equity ownership and value; others abound, as well. Here is a “key” to these 13 risks:

• 1. “When” the company recapitalizes . . . it may never recapitalize.
  2. The word “intends” is not binding in law.
  3. “Plans” are sets of rules, many of which almost surely present further risks.
  4. There may be 10 classes of stock, each treated differently, some to lose value.
  5. “Adoption” of the plan may never take place.
  6. The “recommendation” may not be accepted by the Board, or delayed for years.
  7. “Fair Market Value” is often meaningless in non-public companies, and may be defined unusually even for public companies.
  8. “Terms and conditions” have a significant effect on value, and ability to sell, etc.
  9. There is no “standard” agreement of any kind.
  10. Stock Award Agreements often contain serious restrictions, even non-compete’s.
  11. “Vesting Schedules” may contain vesting restrictions, even events of forfeiture.
  12. “Start Date”: Scheduled date, actual date, or other definition?
  13. “Continued Employment” may be denied, without any cause or even rationale.

B. Fortunately, There are Ways to Reduce, even Eliminate, Most Such Risks
Every risk has a potential remedy. There are a range of different risk-limiting requests that might be suggested to an employer, some specific, meaning they apply to each distinct risk separately, and some broad, meaning they apply to all risks in one step. The important thing is to make the best request, and in the most likely acceptable manner. Our general rule is that, so long as a request is (i) respectfully made, (ii) reasonable in scope, and (iii) supported by a compelling rationale, there is almost never a downside to submitting it. “A bashful beggar has an empty purse.” Russian Proverb.

C. There is No Reward without Risk, but Blind Acceptance of Risk is Foolhardy
Many candidates do not want to make requests for changes to offer letters and employment agreements, for a variety of reasons. That is entirely respected and often wise. However, just knowing what risks exist – and especially to equity awards – has considerable value, so that later requests for better treatment, when appropriate, can be timely made and put forward with positive effect.

Risks, once understood, are “one half resolved.” Risks arise in all we do, every day. We are never able to remove them all. But just being aware of what risks there are is important, so we can navigate around them in later days.  “Just because waters are calm, that does not mean there are no alligators.” Nigerian Proverb.

Equity awards are highly valuable. They should be sought, and protected, to the extent feasible. Understanding them, and the risks of losing them, is an important step in successful career navigation.