Essential Factors to Consider When Negotiating Employment Agreements

By Richard Harroch

Drafting an effective Employment Agreement is essential for clarifying the roles, responsibilities, and rights of both the employer and the employee. This is especially crucial during contract negotiations, which can often become contentious. High-level executives typically turn to seasoned employment attorneys to navigate these discussions effectively.

Key Considerations for Executives’ Employment Agreements

When negotiating agreements for positions such as CEO, CFO, or other high-ranking roles, various critical components must be prioritized:

1. Compensation Details

Compensation encompasses various levels and aspects, and the following points are vital:

• Yearly increments in base salary.
• Eligibility for a signing bonus to offset losses from previous employment.
• Structure of quarterly or annual bonuses—are they guaranteed, milestone-based, or discretionary?
• Conditions under which the base salary might be lowered, particularly in scenarios involving financial difficulties.

2. Equity Compensation

Equity grants can significantly influence an executive’s compensation package. Important considerations include:

• Types of equity grants available: incentive stock options, non-qualified stock options, or restricted stock units.
• Determination of the stock options’ exercise price.
• Vesting schedule—typically a four-year period with a one-year cliff.
• Percentage of equity being offered—should it be based on issued or fully diluted stock?
• Terms for accelerated vesting upon termination without cause.
• Time limits for exercising options post-termination, which generally span 90 days.
• Acceleration clauses in the event of company acquisition.
• Provisions regarding the repurchase or buyback rights of shares acquired through options.

3. Job Scope and Responsibilities

The roles and responsibilities assigned to the executive can be outlined as follows:

• Job title designation.
• Specific responsibilities attached to the position.
• Possibility of demotion or significant alteration of job functions.
• Entitlement to a Board position during tenure.
• Primary location of employment and stipulations regarding relocation.
• Permissibility to engage in outside activities or directorships.

4. Employee Benefits

Understanding the full range of benefits is crucial:

• Participation in company benefit plans, including health insurance, retirement plans, and others.
• Details regarding vacation time, carryover policies, and payment terms for unused leave.
• Potential for special loans, tax implications, and reimbursement for taxable benefits.

5. Employment Duration and Termination Conditions

Clear definitions surrounding employment duration and termination are essential:

• Length of employment term versus at-will employment status.
• Criteria for termination by the employer.
• Compensation terms applicable upon early termination.
• Specific instances that warrant termination for cause, such as legal infractions or breaches of agreement.
• Severance pay entitlements and conditions surrounding health benefits continuation.

6. Expense Reimbursement

Clarification on expense reimbursements is vital:

• Timeliness of reimbursement for business-related expenses.
• Provision of company vehicles or allowances.
• Support for relocation or moving expenses.

7. Liability Protection

Liability coverage is crucial for protecting the executive:

• Inclusion of Directors and Officers (D&O) insurance.
• Indemnification provisions under company bylaws.
• Agreement terms covering protections beyond employment duration.

8. Confidentiality Agreements

Organizations typically mandate confidentiality clauses:

• Incorporation of Confidentiality and Invention Assignment Agreements.
• Restrictions on divulging previous employer’s confidential information.
• Definition and duration of confidentiality clauses.

9. Invention Ownership

The company usually retains rights to developments made during employment:

• Assessing the scope of company rights over inventions and ideas created by the employee.
• Compliance of invention assignment provisions with legal frameworks.

10. Disability & Death Provisions

Provisions concerning disability or death must be clearly defined:

• Criteria for what constitutes a disability.
• Continuation of salary and benefits during disability.
• Posthumous benefits available for dependents.

11. Limitations Post-Employment

Restrictions impacting the employee after leaving the company may include:

• Limitations on soliciting fellow employees.
• Covenants not to compete, including their scope, duration, and enforceability.

12. Dispute Resolution Mechanisms

It is essential to outline how disputes will be managed:

• Terms related to resolution methods, such as arbitration.
• Jurisdiction for potential litigation or arbitration.
• Applicable governing laws.

13. Golden Parachute Clauses

Golden parachute provisions can offer additional security in case of company changes:

• Eligibility criteria for golden parachute benefits upon a change in control.
• Tax implications and potential reimbursement for tax liabilities relating to these benefits.

14. Miscellaneous Provisions

Other considerations can enhance the employment agreement:

• Clauses regarding attorneys’ fees in case of disputes.
• Confirmation that the agreement represents the complete understanding of terms.

About the Author

Richard D. Harroch is a Senior Advisor with extensive experience in mergers and acquisitions, venture capital, and business contract negotiations. He has authored numerous books in the business domain and has held key roles in leading venture capital firms. Connect with him on LinkedIn.

Copyright © Richard D. Harroch. All Rights Reserved.