Sklover & Company, LLC
Serving Executives, Professionals and Senior Managers
5. Equity “Trap Doors”
“Learn from the mistakes of others. Life is too short to make them all yourself.”
– Louis Pasteur
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  the Company’s recapitalization, the Company intends  to adopt an equity incentive plan  pursuant to which the Company will grant you 25,000 shares of its Class A  common stock. Upon the equity compensation plan adoption  the Company will recommend  to its Board of Directors that you be granted those shares with a fair market value  of no less than $250,000 on the date of the grant. The grant shall be subject to the terms and conditions  of the equity incentive plan and the standard  form of stock award agreement . The vesting schedule  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 , subject to your continued employment  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:
- “When” the company recapitalizes . . . it may never recapitalize.
- The word “intends” is not binding in law.
- “Plans” are sets of rules, many of which almost surely present further risks.
- There may be 10 classes of stock, each treated differently, some to lose value.
- “Adoption” of the plan may never take place.
- The “recommendation” may not be accepted by the Board, or delayed for years.
- “Fair Market Value” is often meaningless in non-public companies, and may be defined unusually even for public companies.
- “Terms and conditions” have a significant effect on value, and ability to sell, etc.
- There is no “standard” agreement of any kind.
- Stock Award Agreements often contain serious restrictions, even non-compete’s.
- “Vesting Schedules” may contain vesting restrictions, even events of forfeiture.
- “Start Date”: Scheduled date, actual date, or other definition?
- “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.
We offer confidential telephone consultations as a first, preliminary step in providing counsel to those with workplace or career problems or opportunities. They are available days, evenings and weekends, depending upon urgency. For those with questions related to matters on which we were retained and worked with them during the preceding 12 months, brief discussions, without review of new documents, are provided without charge. For others, our Schedule of Consultation Fees can be found on our About page. Consultation arrangements can be made with Ms. Vanessa Mustapha or Ms. Phyllis Granger at 212.757.5000, or by email to Vanessa@ExecutiveLaw.com or Phyllis@ExecutiveLaw.com.
(If you have any thoughts, comments or suggestions about these Insights, please consider sharing them with us, by forwarding them to us at Vanessa@ExecutiveLaw.com. Thank you, in advance.)
© Copyright 2019 Alan L. Sklover. All Rights Reserved and Strictly Enforced.
1. Your Unique Career Brand
“Either you are distinct, or you will become extinct.”
– Tom Peters
We are enthusiasts when it comes to the practice and pursuit of branding and, of course, when it comes to employment, the notion of “career branding.”
Each of us has a unique personal brand, namely what others think of when they think of us. It is their sum total view of what we offer the world, our value to others, and to our clients, customers, employers and colleagues. Your brand precedes you, empowers you, and follows you, wherever you go.
Your “career brand” is what your present employer and all potential employers think of your potential value to them, and thus what they need to offer you in return for your working for them. Your knowledge, skills, relations and reputation have taken a great deal of time and effort to learn, acquire, and develop, and is a reflection of your personality, character and the standards you have set for yourself.
You create your brand each and every day, whether you know it or not. If you don’t proactively create and enhance your career brand, you leave that critical task to luck and chance, or worse, permit others to define it for you.
The employment marketplace is an increasingly competitive place. New York Times columnist Tom Friedman has written “Good enough is no longer good enough.” We could not agree more. If you don’t have a distinctive, attractive, outstanding career brand, in the employment marketplace you are likely perceived as little more than an easily replaceable commodity.
Most of our clients have devoted and continue to devote significant effort and imagination to creation and enhancement of their own, distinctive career brand, and enjoy the multiple and varied “fruits” of their efforts. Their experiences are as inspiring to us as they are rewarding for them, in the broadest sense and spirit of those two words.
- Your Unique Career Brand
- Managing Employment Risks
- The Recruitment Phase
- The Negotiation Phase
- Equity “Trap Doors”
- Climbing the Ladder
- If Difficulties, Disputes or Allegations Arise
- Navigating Employment Departures
- Continuing Restrictions
- Extending Career Longevity