Continuing our exploration of the questions necessarily asked by an experienced executive employment attorney assessing a particular executive’s potential equity award(s):
3. What happens to the accumulated equity, vested or unvested, when the executive resigns or is terminated?
Here, too, everything depends on the language of the particular equity plan. It is dangerous to generalize, and nothing substitutes for a fresh and full reading of the plan, but commonly the executive’s resignation triggers the forfeiture of (at least) all unvested equity.
But what happens if the executive’s termination occurs as a result of the executive’s death or permanent disability? Again, the plan or the specific equity award agreement provides the answer.
Termination for “Cause” (the language of which is usually a key point of discussion if not contention in the negotiation of any executive’s contract) almost always works a complete forfeiture of rights to equity and any and all other forward-looking compensation.
Termination without “Cause,” e.g., the executive is made redundant or the employer simply decides “to go in a different direction,” is, of course, the most frequent circumstance underlying an executive’s separation from employment other than resignation.
Accordingly, its effects must be carefully analyzed under the language of the governing documents, and it is here that executive employment attorneys usually find the greatest variety in what happens to the terminated executive’s equity awards.
Sometimes termination without “Cause” works a forfeiture of the executive’s equity which has not yet vested. In other plans, by contrast, termination through no fault of the executive causes part or maybe even all of the unvested equity to vest, either in some accelerated fashion or on the future dates when the equity would otherwise have vested if the executive had continued to be employed. In other instances, although the plan might otherwise forbid any variance in the treatment of an executive’s equity awards upon termination without Cause, it is possible that a more favorable result can be achieved by the executive employment lawyer in the negotiation of the executive’s initial or renewal employment agreement.
Once again, drilling down on the precise terms and conditions of whatever type of equity is being offered by the employer not only allows the executive to fully understand the offer, but also, if there is any possibility of improving those terms, allows them to be negotiated before the executive signs up in the first place.
4. Are there any hidden details in the equity award or the governing plan which the experienced executive employment attorney needs to ferret out in order to fully inform the executive client of limitations and/or restrictions which may not be contained in other hiring documents?
To repeat, nothing can be taken for granted and nothing substitutes for a detailed reading of the documents by both the executive and his or her attorney.
For instance, we have seen documents governing an executive’s equity award or profit participation contain so-called “restrictive covenants,” including non-competition and/or non-solicitation agreements which significantly limit what the executive can do when they leave that particular company’s employ. When such restrictions, often written as a necessary condition to receiving the subject equity, are contained in documents which an executive may have overlooked or ignored before they became our clients, learning about these restrictions and their effect on the executive’s future employment offers a particularly nasty surprise.
As a result, focusing on the details of an equity award, guided by the analysis of a knowledgeable executive employment lawyer, before accepting employment (or, having accepted employment, later agreeing to accept some type of equity award as part of their compensation) is the way to avoid such a surprise.
The type of contract terms and conditions in executive equity awards considered in this series of articles is not exhaustive, but, hopefully, will give the executives who read them a few of the core considerations which their executive employment attorneys must take into account.