Essential Employment Contract Terms for Medical Device and Biotechnology Executives
This article was published in CEO World Magazine on December 29, 2018.
The medical device and biotechnology industries are fast growing and so is their demand for CEOs, C-suite and senior executives, with ever rising compensation being awarded to those in demand. If you are an executive in this industry or aspiring to become one, you should take care to review your employment contract, understand its terms or negotiate for better terms before accepting it. Otherwise, you could be leaving money on the table, or open yourself to substantial damages in case of separation.
This article discusses points for you to know and watch out for on signing bonus, performance incentives, equity in life science companies and other key terms, the next time you get a job offer or negotiate an executive employment agreement.
When you leave for a position, you may lose the vesting equity and benefits, stock, options, long term incentives, 401k benefits, etc. that you have accrued in your current position. These compensation and equity terms designed to instill and reward executive loyalty are often called “golden handcuffs”. Your new employer should be asked to furnish the “golden key” to unlock those golden handcuffs. That is, the new employer should well make you whole for what you will forfeit with a signing bonus.
In addition, added value should be provided in that signing bonus to compensate you for leaving a stable and secure CEO or senior executive position and taking the risk to accept a new position where you will need to prove yourself again and navigate company politics in a new executive suite or Board of Directors.
The signing bonus can take the form of cash or immediately vested equity. Often an employer may include provisions to pay back that bonus, and you want to be careful that such positions are drafted so that conditions are those under your control.
Performance and bonus incentives
For fast growing medical device and biotechnology companies, compensation and equity are often tied to performance. You will seek a market salary and typically 4-year vesting of equity. But you also want to seek a significant portion of your cash compensation in bonus pay. The bonus ought to be tied to performance – your personal performance or that of the company, or both. That performance may also be tied to milestones in the company’s achievement.
Milestones in your employment contract can be different for medical device and biotech executives. This is because medical device companies and biotech companies often have different exit strategies. For a medical device company, the exit is usually through acquisition, and the milestones will be designed according to the path to reach the inflection point for an acquisition. Whereas for biotech companies, the goal is often an IPO, so the milestones are targeted towards developing the science far enough so that an IPO becomes realistic.
In each case, you want your executive contract to, wherever possible, provide terms so that your bonus is not entirely discretionary, but rather sets up some goal posts for you and assurance that the bonus or added equity vesting will occur if progress toward the objectives is achieved on your watch.
Your Equity in a Life Sciences company
For fast growing medical device and biotechnology companies, executive employment contracts not only feature performance terms, but equity as a critical component of executive compensation.
If the terms of your equity package are properly designed and structured, then you will have a fair share in the life sciences company’s success, and in that case the value of your equity has the potential to vastly exceed that amount of compensation you are paid.
Often you will work for a life science company that does not succeed and you will be glad you at least had a market salary, because the equity was worth little, certainly nothing to write home about. But this should not discourage you. It is important to always have the right terms for your equity in each executive employment contract you sign. Because when there comes a time in your career when you do hit it right and the company does succeed with a 10x acquisition and an IPO, at that moment you will be glad you have a contract that assures your benefit from the success as well.
What are the right terms for life science CEO or senior executive equity?
This will vary depending on the history, stage and cap table of the company, and yours and the company’s objectives. You will always want a certain amount of equity, commensurate with your position and the skills and experience you bring to the company, and amount of equity sufficient so that you will make a real score if the company succeeds. It is equally important that the mix of restricted stock, RSUs, options or even SAFE documents is right for the deal and your taxation, and that the final equity terms provide for your equity protection, retention, information rights, cash-out and other key terms.
Relocation and other Executive Expenses
Boston, Los Angeles, New York, Philadelphia, Raleigh-Durham, San Diego, San Francisco, Seattle, Washington-Baltimore – are often listed (in alphabetical order) as the nine foremost regions for medical device and biotechnology companies in the US and there are many other major regions as well.
As a result, the life sciences CEO and senior executive, in demand for his or her skills, will often have attractive opportunities from one or more of these nine regions or others. So, relocation and other expense issues are also an important part of your executive employment contract.
With relocation, the executive should seek two key terms – temporary and permanent. Too often I have seen my client uproot his family and the job is not right. They sacrificed, the job soured and they are not where they want to be. Temporary relocation is the remedy – terms that provide at least 6 months and often as long as 18 months, so the executive can commute and the family can adjust and set the right time (taking into account school year etc.) before a permanent move is made. And then of course, full expenses including, if needed, the tax gross-up so that the company bears the full cost of that permanent relocation move.
Other expenses of the life sciences executive should also be included in your contract. If you are an MD, include any license or continuing education costs to remain current in your field, plus any trade association memberships, fees and attendance at relevant conferences, and business class travel for cross country or international flights.
Even though you are taking up a new position, you should have clear severance terms in your employment contract to ensure a smooth transition to your next challenge, and to safeguard your interests in the event of termination. Key severance terms include definition of termination for “cause,” termination for “good reason,” constructive termination, non-compete provisions, non-disparagement, and severance compensation. Executive severance terms protect your employment, career and reputation and should not be overlooked in your contract negotiations.
Additionally, because performance incentives and equity can be such a significant part of the executive compensation package for the life sciences CEO or senior executive, you want those terms clearly addressed in the severance provisions of your employment contract. If you are terminated without cause or you resign for good reason, you want the prior bonus and this year’s prorate bonus paid, and pro-rated vesting on equity. If equity is to be bought out, you also want a clawback so you too can share in the cash benefit of any acquisition or IPO that concludes not long after your departure. Your employment contract should also have suitable protections for you in the event that payments to you could be subject to the golden parachute provisions of the tax law.
So much is at stake when you join a new medical device, biotechnology or other life sciences company to take on a new challenge! It is wise to hire an experienced executive employment agreement attorney to help you negotiate and secure the best employment terms for you.