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The Promise and Perils of Executive Equity Awards — Part 1

My late father relished the following story, which should stand as a cautionary tale for executive employment attorneys and their clients.

A salesman was making a great deal of money on commissions. He had just finished his best year ever when the boss came to him and told him that the owners of the company had decided to make him a partner of the firm. The salesman was thrilled. He told the boss that this was the precise opportunity he had been working toward and waiting for.

Of course, his commissions were stopped and he began to receive a modest monthly draw. He was told that the partners’ earnings were computed and paid out at the end of the fiscal year. When that time came, the salesman eagerly asked when the partners would receive their year-end checks, only to be told that there would be no annual distribution that year because the firm had suffered a loss.

This was the moment the salesman realized that the owners had made him a partner in order to avoid having to pay him continued big commissions on a regular basis.

As executive employment attorneys who handle the contractual arrangements of senior executives when they are hired and fired, we routinely represent executive clients who have been promised or are actually receiving a meaningful portion of their annual compensation in the form of some type of equity award.

These awards range from actual equity to various types of stock options to “phantom” equity in the form of some direct or indirect profit participation, but they all, presumably, represent different kinds of mechanisms by which the executive can share in the success of the employer’s enterprise. Some of them can be lucrative in certain circumstances, but all should be appraised with the same type of caution which the commission salesman should have exercised when presented with his supposedly glorious partnership opportunity. Each type of executive equity award comes with its own limitations and restrictions as well as its (often made more obvious) upside, so any executive presented with the opportunity for such an award should have a knowledgeable employment compensation attorney carefully review the terms and conditions of the particular award. These terms are customarily found in one or more documents, usually consisting of the overall “Plan” as well as the specific award agreements under which the equity award is offered to the executive.

These plans, drawn up by sophisticated corporate, securities and tax attorneys, need to be studied and analyzed in detail, so that the executive (unlike the unwary commission salesman) fully understands the requirements and limitations of the award arrangement to which he or she is agreeing. Since there is considerable variety in such plans and awards, nothing can be taken for granted. The devil is, as they say, in the details, and the executive must also be made to understand that these plan details are rarely if ever changed to fit the preferences or needs of any one particular executive, particularly if the executive’s contract contains no indication that the executive was promised any different arrangement.

As executive employment attorneys, one of our saddest experiences, many years ago, was provided by a client who had over a million dollars in stock options when he departed from his job with a large company, but who had failed to read the details of the plan and award governing those options, and therefore did not attempt to exercise them until several months after they had expired by their terms (the plan provided that he had only 90 days to exercise his options, running from the date on which his employment ended). There was nothing that anyone could do for him at the point when he came to us, and his dawning realization that his own failure to consult an executive employment lawyer before it was too late had cost his family a million dollars was excruciating.

In Part 2 of this topic, we will consider some of the most common limitations and restrictions incorporated into various plans governing executive equity awards and their implementation.

About the Author

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George Birnbaum

Since 1980, sophisticated business people have relied on George to apply the meticulous preparation, attention to detail, and devotion to his clients he learned from fabled trial lawyer Louis Nizer. A graduate of Harvard College and Harvard Law School, George has over 35 years of distinguished deal-making, litigation, mediation and arbitration experience which he has used to negotiate high-stakes agreements for senior executives and select business clients throughout the United States.