Ø      Is an Employment Contract Necessary?

    Ø      Platform, Position, Launching Pad

    Ø      Cash Compensation and Benefits

    Ø      Equity: Corporate/Tax Structure

    Ø      Termination, Severance, Non-Compete

    Ø      Good Vibrations      

By Robert A. Adelson, Esq.
EXAMPLE (Hypothetical and Fictitious)

Engineer Bradee                                                            MicroscopicSoft, LLC

Employee Offer Sheet:                                              Company Profile:

Salary: $225,000 plus bonus                                                         Bus: Software

Benefits: HMO Med/NoDent/                                                         HQ: Eugene, OR

401K, Life/Dis insur  Perqs: blackberry               Assets: $2 mil net (12/31/09)

Term:  At Will                                                                   Sales: $10 mil FY ‘09

Severance: 3 mos                                                           P(L): ($0.5 mil)

Expns : Relocation                                                         Stock : 20 mil o/s LLC units

Pos: EVP COO                                                                                      Exchange: Private

Outside Bds:  None                                                                            Employees : 50

Equity : 100,000 units (NQ)                                                         Est.: 2002  

Full-time Employment with Emerging Hi-Tech Company

            Thomasina Bradee, PE of  Wellesley, MA, is an executive considering a job move.  She is now VP Sales with the Harris Graphics Division of ZEN Development Corp. a local software company recently acquired by giant Big Blue Machines, Inc. (BBM)

            Bradee recruited the sales team and developed marketing and channel strategy for Footnotes, Zen’s top sales product, and has been offered the EVP & COO spot with MicroscopicSoft, LLC, a young Oregon software company.  Founded by Gyl Bates, Microscopic focuses on products similar to Footnotes and has backing from Bates who head a large company also located in the Northwest with a similar name.  Microscopic still has $3 million in assets (including a Company facility in Eugene) net of long term liabilities.  It has experienced recent losses from operations this past year, its burn rate increasing, but it also believes itself well positioned for a possible liquidity event next year.

            The package offered to Tom includes $225,000 salary (50k deferred) with 20% bonus, plus relocation expenses and options for 100,000 units vesting over 5 years.  Fair market value is now estimated at $0.50 per unit which would be Tom’s strike price.

            Bates is anxious for Tom to start.  Bates particularly wants her to attend a big trade show for Microscopic in Chicago sponsored by Alex Blue, showcasing Microscopic among Blue software clients.  As Tom packs for Chicago, she does have some concerns about uprooting her family and sale of her home purchased at the height of the market.  She is also concerned about recent sales results, reception of Microscopic’s latest product offering, and some articles in trade literature mentioning Bates’ frustration and listing Microscopic as a potential takeover target for others in the footnotes market.  But Tom is unsure of her position with Zen, now part of BBM, she likes the challenge, and with more information she thinks she can help Microscopic’s market position.

            Tom just gave her current boss BBM’s Gertner Louis, notice of her plans.  She never had an employment contract before, and it occurs to her, she ought to have someone look over the “term sheet”.  Gyl e-mailed and asked her to sign and return.  Hence, on a friend’s referral, we have received Tom’s car phone call on the way to the airport. 

BEYOND THE HANDSHAKE . . .

IS AN EMPLOYMENT CONTRACT

REALLY  NECESSARY?

QUESTIONS OF THE EXECUTIVE:

¨     When does asking for a contract make the most sense?

¨     How and When to ask for a contract if not offered?

¨     Will raising this now kill the job offer?

¨     How and When to uses a lawyer or advisor?
(Won’t a Lawyer kill the deal for sure?

¨     Who negotiates and how does it proceed?

¨     What documents are involved?

¨     What will this cost?

¨     What if the Company won’t change anything?

QUESTIONS OF THE COMPANY:

¨     When does offering a contract help the Company?

¨     Will a contract open the company to liability?
(Isn’t at-will employment best for all?)

¨     Will a contract’s terms cause Company problems -
with Existing Employees? . . . with Investors?

Besides Compensation . . . Other Key Terms in Negotiating Executive Employment Contracts

«Position, Platform and Launching Pad

1.      Title and Position; Reporting

2.      Board of Directors Membership

3.      Duties and Responsibilities

4.      Support; Budget

5.      Outside Affiliations

6.        Term of Agreement

7.        Renewals; Exit (“rip-cord”)

«Relocation and Expense Reimbursement

1.      Temporary Living and Travel

2.      Permanent Relocation

3.      Tax Gross-Up

4.      Business and Professional Expenses

5.      Licenses, memberships

6.      Other costs including contract costs

«Termination and Severance

1.      Early Termination by act of Company

2.      Early Termination by act of Executive

3.      Cause, Cure, Notice

4.      Severance – relation to surviving covenants

«Change of Control

1.      Form and Amount of Benefits

2.      Parachute Exceptions, Caps, Tax gross-up 

«Non-Competes and Restrictive Covenants

1.      NDA/Confidentiality Agreements

2.      Assignments of New Inventions

3.      Non-Solicitation

4.      Non-compete

«Good Vibrations

     1.      Good Contract can be very valuable, but it does not itself make a good job, nor is it a substitute for good intelligence.

     2.      If your informants and gut tell you it’s a winner be prepared to concede on contact issues.

HOW DO WE STRUCTURE EXECUTIVE

CASH AND EQUITY COMPENSATION

AS A WIN-WIN FOR  BOTH  SIDES?

QUESTIONS OF THE EXECUTIVE:

¨     The Big Boys get signing bonuses – can you get one here?  Can you justify a large salary increase as well?

¨     If you want to avoid taxes, how do you structure deferred salary to avoid the tax hit and still get paid?

¨     How do you protect your bonus and assure it is paid?

¨     When does taking equity as your pay make the most sense?

¨     What types of stock or options can the company offer?�
What’s the value?  How is this equity taxed?

¨     How do you avoid dilution?  What other structuring issues do you need to protect your equity stake?

QUESTIONS OF THE COMPANY:

¨     When is a Company smart to offer equity or bonus pay?

¨     Can this equity be paid based on performance? or loyalty?
Can we measure performance? how much stock to give?

¨     What if things don’t work out:  Can we get the stock back?
What if Executive dies? Quits? What if we sell the Company?

¨     Will giving stock now hurt us later? in seeking financing?
in morale with current staff? in recruiting new talent?

«Cash Compensation

      1.      Signing Bonus

• Evidence Commitment by Employer
• Replace lost benefits (golden key)
• Payable in Cash, Equity, Other

      2.      Base Salary

      3.      Deferred Compensation

• Funded or Unfunded
• Convertible Debt
• Rabbi Trust or Secular Trust

     4.      Bonus Income

• Guaranteed or Discretionary
• Performance Based

«Fringe Benefits

      1.      Medical, Dental and Health Benefits

      2.      401(k), Pension, Profit Sharing Plans

      3.      Life and Disability Insurance

      4.      Vacation, leave; Company Perquisites

«Equity Incentives:  Based on Tax Structuring

     1.      Restricted Stock Purchase Plan

• IRC §83(b) Election

     2.      Stock Option – Qualified (§422) ISO

     3.      Stock Option – Non-Qualified

     4.      Equity Based Compensation Plans

• Phantom Stock & Stock Apprec. Rts (SAR)
• IRC 409A compliance

«Key Terms in Executive Equity Negotiations

     1.      Vesting and Change of Control

     2.      Valuation and Anti-dilution

     3.      Stock Option Terms and Exercise

     4.      Purchase Terms and Covenants

     5.      Transfer Restrictions & Shareholder Agreements  

Negotiating Severance and The Separation Agreement

1. 1.   Severance Pay and Benefits

• Amounts and timing
• Allocations to Emotional Distress, Attorneys fees and medical expenses to save taxes
• Payments for attorneys fees, outplacement and other specific costs to enhance severance
• Medical coverage
• Other Employee Benefits
• Duration of severance

1. 2.   Job Search and reputation

• Outplacement
• Office Space
• Inquiries from contacts and potential employers
• References
• Confidentiality
• Mutual non-disparagement

1. 3.   Releases

• Mutual release
• Legal rights
• Rights to enforce settlement

1. 4.    Enforcement
2. 5.   Cooperation

ABOUT THE SPEAKER AND PRESENTATION . . .

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801 Boston, MA 02110, (617) 951-9980, fax (617) 951-0048. His e-mail is radelson@engelschultz.com .  Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, Northwestern University Law School in Chicago where he was a member of the Law Review, and New York University with an LL.M. in Taxation.  He is a member of the Massachusetts, New York and U.S. Tax Court Bars.

Robert Adelson began his career in 1977 as an associate at major New York City firms before returning home to Boston in 1985 where he’s been a partner in smaller firms, joining his present firm as senior business attorney in 2004. Mr. Adelson is   specialized in corporate, tax, employment, commercial contracting and intellectual property law.  He frequently represents employees and executives negotiating their employment terms, stock, options, relocation, non-competes, termination and separation agreements.  He also represents startup and smaller companies in software, medical device and other technology-based fields, independent consultants with compensation and stockholder arrangements, incorporation and liability protection, intellectual property protection, and in vendor, client and subcontractor contracting arrangements.

Mr. Adelson’s  law firm, Engel & Schultz, LLP, has 6 attorneys based in Boston.  The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in family, probate, real estate and litigation matters. 

            Mr. Adelson is a frequent speaker at business forums and Chairman of IEEE Boston Entrepreneurs Network www.boston-enet.org .  Further information on Mr. Adelson’s background and his past published articles is available at his law firm website.  To view articles, see http://www.engelschultz.com/index.php/category/publications/  or http://robadelson.wordpress.com/

The speaker wishes to thank Marg Balcom for the invitation to speak on the topic of “Negotiating Compensation and Employment Contracts” for the Boston Chapter of ExecuNet at Dedham Community Center, Dedham, Massachusetts, on April 12, 2010.

The example on page 2 is hypothetical and fictitious but the questions on page 3 and 6 are drawn from actual client questions.  The purpose of the example and materials, as developed by Robert Adelson, is solely to illustrate planning concepts and stimulate meeting discussion.  The purpose of the remainder of these materials is to illustrate and offer rough outlines of broad areas of corporate, tax, contracts and business law which affect executive employment contracts, stock and compensation in high technology and more traditional fields.  Thus, it is hoped these materials will be informative to those in attendance.  These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case. 

Copyright (c) 2010  Robert A. Adelson.  All rights reserved.