In the arena of executive compensation, an employment contract may contain complex terms relative to equity compensation. It is important to understand that this can be an area that increases your overall compensation package through creative vesting and acceleration schedules. In this case, there are several reasons you may consider engaging an attorney to assist you before you sign the employment contract, job offer, or equity agreement you receive.
Understanding the Contractual Landscape
Executive contracts can be intricate, including aspects of corporate law, tax implications, financial regulations, and employment law. Understanding these various elements, and how they interact, is important.
Because equity agreements are complicated, it can be difficult to understand the areas that may be subject to negotiation to help increase your compensation package. Negotiations can involve several important areas when a grant of equity is
Common Areas of Negotiation in Stock or Option Agreements
- Equity Percentage:
One of the primary areas of negotiation pertains to the amount of equity you are offered, often expressed as a percentage of the total company’s total equity. More equity means more potential for profit, but it also means that you as the employee bear the risk of a decline in the value of the shares over time. The exact number of shares you are granted or entitled to purchase and the price per share will generally be specified in the option or restricted stock agreement you receive.
It is important to closely review the terms of these documents, request a copy of the company’s stock option plan, and ensure you have all pertinent information relative to standard equity grants applicable to your position when reviewing an offer and executive compensation package proposed.
- Types of Equity:
Equity grants in a corporation can be made in the form of stock options (either statutory or nonstatutory) or restricted stock.
A stock option gives you the right to purchase shares of a company’s common stock over a period of time at a specified price, usually referred to as the “strike price.” When you purchase the shares at the strike price, you have “exercised” the option and will then hold stock in the company. Under most stock option plans, a company can issue both incentive stock options or “ISOs”, which must meet certain requirements under the Internal Revenue Code, or nonstatutory stock options “NSO,” which do not have to meet those requirements.
As opposed to stock options, the grant of restricted stock gives you stock in the company immediately at the time of grant although is not immediately transferrable but is generally subject to a company’s lapsing “right of repurchase.” The right of repurchase means the company retains the right to repurchase the stock for a specified period of time. The restricted stock grant may be given to you as a form of compensation, or it may be sold to employees, either at fair market value or at some discount from fair market value. Restricted stock is taxed at the time of grant and there are very important requirements.
- Vesting Schedule:
This determines how and when the stock options or restricted stock “vest,” or become held by you and available for purchase, as it pertains to options, or are no longer available for repurchase by the company because the right of repurchase has “lapsed,” as it pertains to restricted stock. A standard vesting schedule for companies issuing equity is a four-year vesting schedule with what is referred to as a “one-year cliff,” which means 25% of the total number of shares awarded to you will vest on the one-year anniversary of the date of hire. A vesting schedule can frequently be negotiated so it is more beneficial to you.
- Accelerated Vesting:
Accelerated vesting means the equity will accelerate, or vest sooner, in certain scenarios, such as a change of control in the company (e.g., a sale or merger). There are various ways equity can vest in these situations and this can be a key point of negotiation.
- Double Trigger Acceleration:
This provision allows for accelerated vesting if there is a change of control and an employee is terminated within a certain timeframe. There are several ways this can be negotiated to benefit you in the event of a sale or merger of the company..
- Clawback Provisions:
These are terms that allow the company to take back some or all of your stock options or RSUs under certain circumstances. Limiting or eliminating these can be a significant point of negotiation.
Equity Agreement and Employment Agreement Review
It’s important to take the time to review the terms applicable to the grant of equity when you receive an executive employment agreement, offer letter, and grants of stock and options. The type, number, vesting schedule and acceleration should be closely evaluated. Having an attorney with stock and options experience can make a huge difference when it comes to the executive compensation you are offered.
Hammer Law PLLC is not a litigation firm. We do not handle lawsuits, cases, or claims against employers. If you are seeking legal assistance in this area, we will be unable to assist you.