Emplymnt Negotiation

8/7/2019 Emplymnt Negotiation

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NEGOTIATING AND STRUCTURINGEXECUTIVE EMPLOYMENTAGREEMENTS

Robert J. Borghese, Esquire

[email protected]

Borghese Law FirmThe Wharton School of the University of Pennsylvania

© Copyright Borghese Law Firm 2001-2003

SHIBA SANKAR BEHERA

RAVENSHAW MANAGEMENT CENTRE, CUTTACK



NEGOTIATING AND STRUCTURING EMPLOYMENT

The Context of the Employment Negotiation

� The context of the employment negotiation will affect negotiatingleverage which will in turn affect the terms of the employment deal

� Your leverage in any particular employment negotiation will beaffected by the following:

² Point in the lifecycle of your career

² Your skill set, experience, and overall fit with the position

² The condition of the economy and the job market² The norms in the industry of the company you are joining

² The size of the company you are joining

² Other factors affecting negotiating leverage




The Basic Problem

� Basic Problem: structuring an employment arrangement thatbalances

² Employee·s interests in

� Compensation, and� Employment security, and

² Employer·s interest in

� Termination - being able to terminate the employee withminimal financial or legal impact.




Timeline for Employment Negotiation

� Initial Contact

� Initial Interview

� Follow-up Interview

� Discussion of Offer of Employment

� Written Employment Offer/Background Check

� Negotiation of Employment Offer

� Final Execution of Employment Offer




Form of Agreements

� Are Employment Agreements required by law?

� Types of Form Agreements

² Simple Letter Agreement

² Formal Legal Agreement




Building Blocks and Key Legal Issues

� Structuring entrance arrangements (term of theagreement [at-will or contract term], job description,signing bonuses)

� Determination of competitive compensationarrangements (salary, performance bonus, equitycompensation (stock grants and stock options andseverance arrangements)

� Consequences of a change of control

� Intellectual property protection devices

� Structuring exit arrangements, bases of termination,economic consequences of termination, and disputeresolution so both parties· interests are protectedwithout resort to litigation

Employment

Law

Tax Law

Intellectual

Property Law

Corporate

Law

Securities

Law




Types of Employment Relationships

� At-will employment - an employee can be hired orfired and any employment-related action can betaken against the employee at any time for anylegitimate non-discriminatory reason.

² Reasons which would be considered illegitimateor discriminatory would include actions inviolation of:

� Civil Rights Act of 1964

� Age Discrimination in Employment Act

� Americans with Disabilities Act� Other federal and state employment statutes

and regulations

� Public Policy





� Contract employment - employee is hired pursuantto an oral or written employment agreement thatoutlines, at a minimum, the scope, term andgrounds for termination of employment. Thegrounds for termination of employment wouldinclude:

² ´Good causeµ reasons specified in theemployment agreement

² Violation of common law fiduciary duties (as

defined in the employment agreement):� Duty of loyalty

� Duty of obedience

� Duty of care





� Critical Distinctions between At-will and Contractemployment:

² Term (Duration) of employment

� At-will - no term� Contract - defined term (e.g., one year)

² Grounds for termination of employment

� At-will - any legitimate, non-discriminatoryreason

� Contract - ´good causeµ as defined in theemployment agreement




The Most Likely Scenario for an Executive

� The company you are seeking to join will offer youat-will employment pursuant to:

² Offer letter outlining basic job title, andcompensation

² Comprehensive Employment, ConfidentialInformation, Invention and NoncompetitionAgreement




Negotiation Strategy in an

At-Will Employment Relationship

� The ability to negotiate an at-will employment relationshipeffectively is predicated upon a basic understanding of thefollowing:

² The constituent parts of (a) the offer letter and (b) theEmployment, Confidential Information, Invention and Non-Competition Agreement

² The key issues to negotiate: there are obvious issues and non-

obvious issues

² The scope of what is typically negotiable with respect to eachissue

² An understanding of what is considered ´marketµ with respectto each issue




Parsing-Out the Offer Letter� Typical Employment Offer Letter

² Offer of employment, conditions on offer and

position

² Compensation - signing bonus, base salary,performance bonus, benefits and equitycompensation

² Confirmation of at-will employment status




Parsing-Out the Offer Letter� MODEL CORPORATION, INC. [ADDRESS]

� _________ ___, 199__

� [Offeree] [Address]

� Dear ________________:

� Model Corporation, Inc. (the Ćompanyµ) is pleased to offer youemployment on the following terms:

� 1. Position. You will serve in a full-time capacity as __________________ of

the Company. You will report to _________________________. By signingthis letter agreement, you represent and warrant to the Company that youare under no contractual commitments inconsistent with your obligationsto the Company.

� 2. Salary. You will be paid a salary at the annual rate of $_______, payablein semi-monthly installments in accordance with the Company·s standardpayroll practices for salaried employees.




Parsing-Out the Offer Letter� This salary will be subject to adjustment pursuant to the Company·s

employee compensation policies in effect from time to time.

� 3. Stock Options. Subject to the approval of the Company·s Board ofDirectors or its Compensation Committee, you will be granted an option topurchase __________ shares of the Company·s Common Stock. The exerciseprice per share will be equal to the fair market value per share on the datethe option is granted or on your first day of employment, whichever islater. The option will be subject to the terms and conditions applicable to

options granted under the Company·s 200_ Stock Plan, as described in thatPlan and the applicable stock option agreement. The option will beimmediately exercisable, but the purchased shares will be subject torepurchase by the Company at the exercise price in the event that yourservice terminates before you vest in the shares. You will vest in ___% of theoption shares after 12 months of service, and the balance will vest inmonthly installments over the next __ months of service, as described in theapplicable stock option agreement.




Parsing-Out the Offer Letter� 4. Proprietary Information and Inventions Agreement. Like all Company

employees, you will be required, as a condition to your employment withthe Company, to sign the Company·s standard Proprietary Information andInventions Agreement, a copy of which is attached hereto as Exhibit A.

� 5. Period of Employment. Your employment with the Company will be átwill,µ meaning that either you or the Company will be entitled to terminateyour employment at any time and for any reason, with or without cause.Any contrary representations which may have been made to you aresuperseded by this offer. This is the full and complete agreement betweenyou and the Company on this term. Although your job duties, title,compensation and benefits, as well as the Company·s personnel policiesand procedures, may change from time to time, the át willµ nature of youremployment may only be changed in an express written agreement signedby you and a duly authorized officer of the Company.




Parsing-Out the Offer Letter� 6. Outside Activities. While you render services to the Company, you will

not engage in any other gainful employment, business or activity withoutthe written consent of the Company. While you render services to theCompany, you also will not assist any person or organization in competing

with the Company, in preparing to compete with the Company or in hiringany employees of the Company.

� 7. Withholding Taxes. All forms of compensation referred to in this letterare subject to reduction to reflect applicable withholding and payroll taxes.

� 8. Entire Agreement. This letter and the Exhibit attached hereto contain all

of the terms of your employment with the Company and supersede anyprior understandings or agreements, whether oral or written, between youand the Company.

� 9. Amendment and Governing Law. This letter agreement may not beamended or modified except by an express written agreement signed byyou and a duly authorized officer of the Company.




Parsing-Out the Offer Letter� The terms of this letter agreement and the resolution of any disputes will be

governed by __________ law.

� We hope that you find the foregoing terms acceptable. You may indicateyour agreement with these terms and accept this offer by signing anddating both the enclosed duplicate original of this letter and the enclosedProprietary Information and Inventions Agreement and returning them tome. As required by law, your employment with the Company is alsocontingent upon your providing legal proof of your identity and

authorization to work in the United States.

� This offer, if not accepted, will expire at the close of business on_____________ __, 200_.




Parsing-Out the Confidential Information,

Invention and Noncompetition Agreement� Typical Employment, Confidential Information,

Invention and Noncompetition Agreement

² Confirmation of at-will employment status

² Protection of confidential and proprietaryinformation

² Assignment of inventions and other intellectualproperty such as copyrights, trademarks andtrade secrets

² Noncompetition, nonsolicitation,noninterference and related restrictive

covenants




Key Issues for Negotiation� The Obvious Issues:

² Job Title

² Signing Bonus² Base Salary, Benefits and Perquisites

² Performance Bonus

² Term

² Equity Compensation

� The Non-Obvious Issues:

² At-will v. contract employment

² Non-obvious considerations in the negotiation

of the Obvious Issues² Éverything elseµ




Non-Obvious Considerations in the Negotiation of

the Obvious Issues� Title and Job Description - the title, job description,

authority and reporting relationships should befully and clearly expressed to properly memorializethe parties· expectations and is also integral to

determining whether termination for lack ofperformance constitutes ́ good causeµ

� Signing Bonus - after the first position a signingbonus should compensate for certain benefits (i.e.,

unvested stock, stock options or retirement pay)forfeited as a result of prematurely leaving theformer employer




Non-Obvious Considerations in the Negotiation of

the Obvious Issues� Base Salary, Benefits and Perquisites

² Base Salary cannot be reduced

² Guaranteed minimum increases over time

² Guaranteed levels of benefits and perks

� Performance Bonus - specify the range andparameters in advance of the commencement ofemployment or require their negotiation within aspecified period of time after commencement of

employment� Term ² Hidden termination provisions

� Equity Compensation

² What do the number of options mean?

² What is the capital structure of the company?




The Non-Obvious Issues� Identity of the Employer

� Location of Employment

� Extent of Travel Expected

� Relocation Expenses such as travel, temporarylodging, moving, home selling/buying costs

� Benefits

² Health, dental, disability, life insurance

² Vacation, sick, and personal leave

² Automobile² Pension and profit-sharing plans

² Deferred compensation plans

² Other executive benefit plans - career coach, car

² Tuition benefits and continuing education

² Legal/CPA/tax assistance




The Non-Obvious Issues² What about vesting of options?

� Typically 4 year cliff vesting of options

� More options vest up front

� Shorter vesting period� More frequent vesting dates

� Accelerated vesting on ćhange of controlµ

� Favorable vesting on termination other thanfor ́ good causeµ

² What are the provisions of the equitycompensation plan?

² Are options subject to a repurchase right upontermination? What price? Right of first refusal?




The Non-Obvious Issues� Expense accounts

� Spousal travel

� Group automobile insurance

� Club memberships� Scope of noncompetition covenant and related

restrictive covenants

� Scope of confidentiality covenant

� Scope of intellectual property assignment

� Requirement of 30-day prior written notice andopportunity to cure upon a termination for ´goodcauseµ

� Change of control

� Dispute Resolution




The Non-Obvious Issues� In at-will employment, the termination of the

agreement itself is often bifurcated from thetermination of the employment relationship. It ishere where there is opportunity for negotiation

� The objective is to obtain certain benefits upontermination of the employment relationship by theemployer other than for ´good cause,µ or by theemployee for ́ good reasonµ




The Non-Obvious Issues� What is ´good causeµ?

² Broadly speaking it is violation of one or moreof the three common law duties that eachemployee owes to his or her employer, namely,

� Loyalty

� Obedience

� Care

� But in this context, it is typically negotiated

� The definition of ´good causeµ from the employer·sperspective:

² The broadest definition possible, for example,´failure to perform duties in a manner

satisfactory to the companyµ




The Non-Obvious Issues� The definition of ´good causeµ from the employee·s

perspective:

² The narrowest definition possible, for example,ćonviction of a felony or embezzlementµ or´willful misconductµ

² The broadest definition possible, for example,´failure to follow the directives of the Board ofDirectorsµ

� What definition of ´good causeµ is reasonable?

² Something in-between� What is the point?

² In an at-will context if you are fired for a reasonother than disloyalty, insubordination or failureto perform the company has broken its promiseto you and you should be compensated




The Non-Obvious Issues� What other events should constitute a termination

by the employer other than for ´good cause,µ or atermination by the employee for ´good reasonµ?

² Reduction in compensation, benefits, position orduties

² Relocation




The Non-Obvious Issues� Negotiated consequences of a termination by the

employer other than for ´good cause,µ or by theemployee for ́ good reasonµ

² Severance pay for a specified period of time(restrictive covenant/termination for cause)

² Payment of entire amount of anticipatedperformance bonus or, at a minimum paymentof prorated amount of anticipated bonus

² Continuation of benefits such as health,disability and life insurance for specified periodof time

² Acceleration of vesting on unvested equitycompensation

² Extension of period of time for exercise of

vested options




The Non-Obvious Issues� Negotiated consequences of a termination by

employer other than for ´good causeµ or byemployee for a ´good reasonµ

² Acceleration of pension/profit sharing vesting

² Outplacement services

² Relocation expenses

² Termination of noncompetition covenant

² No duty to mitigate




The Non-Obvious Issues� Restrictive Covenants

² Confidentiality (scope of definition)

² Assignment of inventions

² Nonsolicitation of employees, customers² Noncompetition

� Boilerplate provisions

² Jury trial

² Attorney·s fees






Recision of Offers� Do companies rescind offers after they have been

accepted by both parties?

� Do companies terminate employment shortly afterthe employee has joined the company?

� What legal remedies does an employee have undereach scenario?




Final Thoughts� You are unlikely to have much negotiating leverage

out of the gate

� As your career proceeds you have more and moreleverage to negotiate more favorable terms in an at-will employment setting, or preferably, insist on awritten employment agreement

� Companies typically respect employees who

politely and respectfully articulate their requestsand the reasons for those requests in the course ofthe negotiation




Contact InformationRobert J. Borghese, EsquireBorghese Law [email protected]

1515 Market StreetNinth FloorPhiladelphia, PA 19102(215) 567-5900

515 E. 72nd

StreetSuite 34HNew York, NY 10021(212) 490-1400

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Emplymnt Negotiation