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The Promise and Perils of Executive Equity Awards — Part 2

What are some of the important terms and conditions which a knowledgeable executive employment attorney looks for in reviewing an executive’s proposed equity award?

Everything begins with a detailed review and analysis of the plan documents which govern the award, in addition to any individual award agreements given to the executive. As previously noted, the plan, set forth in one or more documents, controls the scheme (in the English sense of an overall system rather than the American sense of something inherently shady). It is important to understand that the plan terms are unlikely to be changed to meet the needs of any particular participant in the plan. Sometimes, in fact, the plan legally cannot be changed and, even if there is some or even a good deal of discretion allotted to the plan administrator or manager, our consistent experience is that the plan is going to be scrupulously followed.

So: what you see and read on the page is what you get, and the executive needs an experienced employment compensation attorney to make sense of the detail contained in the plan documents.

To find the details of greatest importance to the executive whose total compensation package is often heavily dependent on his or her equity awards, there are certain recurring questions which the executive employment attorney needs to answer:

1.     What type of equity award is being offered to the executive?

Is it stock or stock options in a publicly traded entity which, when fully received or exercised, have an immediate value which can be realized by a sale on a public market, or, perhaps more likely, does it consist of some type of phantom equity or profit interest which cannot easily be turned into cash and is dependent on a repurchase or payout from the employer itself? The answer to this question allows the executive to assess the real and/or speculative worth of what they are being offered as a meaningful part of their overall compensation package, and helps them avoid the plight of the hapless commission salesman we discussed in Part 1 of this topic.

2.     What are the key terms and conditions, principally restrictions, under which the executive will (a) receive and (b) actually be able to realize monetary value from, the particular award?

Many executive equity awards, of different types, are not given to the executive all at once but are subject to a so-called vesting schedule over a number of years of continuing employment. The advantages of such a plan of distribution to the employer are obvious: they become the proverbial “golden handcuffs,” providing a tangible incentive for the executive to remain with the employer rather than departing for a more lucrative opportunity elsewhere, i.e., the executive realizes that if he or she takes another job, they will forfeit a meaningful equity or profit participation at their current job. [Note well: the good executive employment attorney may know how to handle this situation if the executive still wants to leave, which will be the subject of a future column.]

And, within the overall vesting plan, there may be other, finer details of which the executive must be made aware, such as the requirement of the precise date on which the executive must still be employed in order to receive that year’s tranche of equity. Is it a date tied to the employer’s fiscal year, or the date when bonuses are created, or the later date on which they are paid or a date tied to the anniversary of the executive’s employment? A lack of awareness of these details has proved extremely costly to many executives who fail to understand the precise scope of their purported entitlement.

Furthermore, different types of equity awards have different tax consequences, another reason why the executive must understand, with the assistance of a sophisticated executive employment lawyer, not only when the particular equity award vests (and so presumably belongs to the executive) but when that vested award can be turned into tangible value and when the executive is going to owe taxes on that value.

In the next part of our examination of this topic, we will deal with other significant questions which must be asked and answered so that the executive can understand what they are actually being offered.

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.