For General Information Only
DO NOT USE WITHOUT ASSISTANCE BY COMPETENT LEGAL COUNSEL
By: Mark Poerio (mark.poerio@executiveloyalty.org) - [Admitted DC, MD, and NY]Date: August 2019
Re: Key Terms of Employment Agreement (employer-oriented)
Presented below is a template for use as a starting point for determining the key terms of an employment agreement (“Agreement”) for a new executive. Common practices are noted in brackets, with italicized bold print. Note that there is no substitute for individualized advice that takes into account the relative positions of a company and its executive, as well as industry and market practices.
Effective Date: ____________ ____, _________
Start Date for Services: ____________ ____, _________
Term: ____ years. < 3 years >
- Automatic annual extensions unless the Board decides otherwise before a renewal date? <__yes>
Base Salary $_____ annually, subject to annual increases per Board discretion.
Annual Cash Bonuses
- The Board will commit to develop a formula by ________ __, ___ <a date within __ days of signing Agreement> that will determine annual cash bonuses < and stock option awards >.
- The formula will be based on corporate performance, and target amounts that make overall compensation competitive on a peer group basis. The principal performances goals will be: _____________.
- Better for Executive: set out the formula within the Agreement – covering cash and future stock awards.Better for Company: retain broad discretion, without formula.
Stock Option Grant
- On ________ ____, _____ < date of hire >, the executive will(one-time? annual?) receive a stock option to purchase _____ shares at an exercise price equal to their fair market value. Other terms: vesting? expiration? cashless exercise? net settlement?[Better for the executive, not company: The option will be an ISO to the extent possible under applicable tax laws.]
Stock Award
- On __________ ___, _ < date of hire >, the executive will receive(one-time? annual?) a restricted stock unit [OR: deferred share unit?] award for _____ shares (to vest over the next ___ years)
- [FOR DSU: to be held for transfer to executive according to an election executive makes more than one year before terminating employment]. <Net settlement>
Claw-back Protection
- Executive will forfeit all [some] stock awards, and any proceeds or shares received through vesting or exercise will be recoverable by the company, if (i) executive violates the loyalty covenants below during employment term or for __ <one> year after, or (ii) a financial restatement arises from executive’s fraud or misconduct.
Other Perks
- Reimbursement for moving expenses up to $_______.
- Country Club? Automobile? Life Insurance? LTD?
- Attendance at specified annual or industry conferences?
- [limit to critical and justifiable ones]
Legal Fees
- Reimbursement for up to $____ for review of the agreement(s).
Termination of Employment
- Due to just cause or resignation without Good Reason: compensation and benefit accruals would cease immediately, and stock awards and unvested benefits will be forfeited.
- Termination without Cause for Resignation for Good Reason (e.g. demotion): compensation and benefits will be paid through the expiration date of the agreement (as extended) [OR: __ times highest [or average] salary and bonus over last __ years]. [Accelerated vesting on stock awards?]
- Due to death or disability: special treatment?
Just Cause (defined) any of the following:
- The [indictment] conviction of any felony or a crime involving fraud, theft or dishonesty or the pleading by the executive of no contest (or similar plea) to the same, whether or not committed in the course of the executive’s employment;
- Dishonesty on the part of the executive in any dealings with or involving the company or its business which may have a material effect on the company, including any use or appropriation for executive’s personal use or benefit any funds or properties of the company, unless such use or appropriation was specifically authorized by the Board, theft, fraud, or the material breach of any of the executive’s fiduciary duties to the company;
- Misconduct by the executive causing material harm to the company, but only if the misconduct is of such nature that the company would be materially prejudiced thereby whether or not the executive discontinues such misconduct;
- Intentional misfeasance or malfeasance or gross neglect of duty engaged in by the executive while carrying out the executive’s duties owing to the company under this Agreement that results in a material economic harm to the company;
- The executive’s impairment due to alcohol or other substance abuse which in the reasonable judgment of the company affects or interferes with, or may affect or interfere with, the executive’s performance or capacity to properly discharge executive’s duties;
- The executive’s material breach of a material company policy or of any fiduciary or other regulatory requirement applicable to the executive; or
- Any breach by the executive of any material provision of this Agreement.
Good Reason (defined): Any of the following:
- the executive’s position changes as a result of an action by the company such that (i) executive shall no longer be ___________ of the company, or (ii) a material reduction of or change in the executive’s authority, duties and responsibilities has occurred that is inconsistent with the authority, duties and responsibilities typically associated with the foregoing position as such position relates to the business;
- the requirement that the executive relocate his or her primary place of employment, other than a relocation within ___ [50] miles of the company’s office located in ______________;
- a material reduction in the executive’s base salary; or
- any material breach of this Agreement by the company.
- Right to Cure: for either of the above that is capable of cure, there must be written notice and an opportunity to cure that lasts at least __ [30] days.
Change in Control Change in Control
- Definition – same as ____________Plan (normally select a commonly used definition, or update all to be consistent)
- Enhanced Severance for Without Cause or Good Reason: The executive will receive _______ < 2.99 > times the highest W-2 income that the executive has received, plus accelerated vesting on all awards.
- Such payments will be made if - -(1) the executive terminates employment for any reason other than for just cause within a window period of __ [30] days beginning __ [6] months after a change in control, or(2) his employment terminates involuntarily or for good reason within __ months before or __ months after a change in control.
280G Tax Gross-up
- The Company will make an additional payment if needed to hold executive harmless from taxes imposed under the Code’s golden parachute rules. [only for select few executives after cost analysis]
Funding of Rabbi Trust
- Within __ [30] days after a change in control, the company will fund a rabbi trust with assets sufficient to pay all severance and deferred benefits.
- Trust assets would become immediately payable to the executive upon an event indicative of the company’s financial distress (for example, a dramatic decrease in its revenues).
Restrictive Covenants
- Non-compete? Non-solicit? Non-disclosure? Non-disparagement? How long for each after termination of employment???
- Claims Release Required for any severance payments. What form? Attach to agreement?
Litigation
- __________ law would govern
- ___ the company will reimburse the executive for legal expenses incurred to successfully enforce the agreement.
- [OR: __ successful party recovers fees.]
- [ALTERNATIVE: mandatory arbitration]
Private Co. Only
- Executive Protection: During the period of __ months that begins __ months after the executive’s termination of employment for any reason, the executive may surrender to the company all or some of the vested company shares that the executive owns, and the company will pay executive the then fair market value for such shares. [Appraisal? Installment payment?]
- Company Protection: company shares issued to the executive will be subject to (i) company repurchase rights, rights of first refusal, and/ or terms of a shareholder’s agreement.
< The End >