Negotiating Executive Retention Agreement Terms To Protect Your Interests
By Robert A. Adelson
This article was originally published in CEO World magazine on April 26, 2019.
In today’s turbulent business environment, C-suite executives, especially CEOs, CMOs, CSOs and CTOs in technology and life sciences, do not stay in the same job for many years. Sometimes they are lured to more attractive opportunities. Other times, their companies are acquired by or merge with another company.
In these situations, the company may ask the executive to sign a retention agreement or change of control agreement. In other situations, the executive can try to initiate a retention agreement. Why do companies want retention agreements? How does a retention agreement benefit you as CEO, C-Suite or other senior executive? What key terms should you have in order to protect your interests? This article explores each of these issues, beginning with the circumstances that give rise to these agreements.
Change of Control Agreements
The best-known use of retention agreements is when a company is “in play” – a target for acquisition and it is critical to the company owners that the company not lose key management in the months leading to the sale. In an earlier CEOWorld article, I gave focus to these special retention agreements, also called “change of control” agreements. Check this article if you are in a change of control situation.
Other Occasions for Retention Agreements
But there are many other instances where retention agreements arise that the senior executive should be aware of and seek to negotiate appropriate terms rather than simply agree to the retention terms desired by the company.
The most common retention agreement arises when a key executive in the company is being recruited and has attractive opportunities to move to a new company. At that point, when such opportunities are coming to fruition, the CEO or other senior executive should do a self-assessment of his or her value to his or her current employer and thus the prospect for negotiation of a retention agreement that could be a “win-win” for the executive and his or her current employer.
There are a number of instances where the value of the CEO or senior executive is so high that it would justify a retention agreement to keep the executive in place, including these circumstances
- Milestone – the company is nearing a critical milestone, perhaps even an inflection point that could lead to a liquidity event
- Funding – the company has plans to seek new funding
- IPO – the company is planning for its IPO or needs an executive lockup as part of its IPO process
- Business dependence / customers – the executive has close relationships with key accounts and the company fears a significant loss of business
- Business dependence / employees – the executive has close relationships with key management and performers in the company and fears a significant attrition
- Business dependence / technology – the executive as an inventor, innovator and technologist has a critical role in product creation, maintenance or development
- Business dependence / good will – the executive has achieved a level of notoriety such that his or her loss could have a negative impact on perception of the company within the customer or business community where the company operates.
Proposing a Retention with your Company
If you identify any of these circumstances as applying to you, then once the offer of a new and attractive opportunity has been received or is imminent, it may then make sense for you as CEO to approach the Board or you as COO, CMO, CTO or other senior executive to approach the CEO, to indicate that you are considering leaving and invite the company to explore a retention agreement with you.
The conversation should identify the company’s need for retention, what your departure could cost the company, and how your agreeing to remain for a certain period will avoid the immediate negative impact or enable the company to work with you to reduce its dependence on you.
In some retention agreements, the executive would agree to defer his or her start time a few months and that might be sufficient where the company’s biggest need is short term. However, in many instances, the company’s retention need is six months or more. In that case, the executive must choose – company retention and give up the offer, or just take the new offer.
Framing the Retention Compensation as Pay-back to the Company
From the standpoint of the CEO or other senior executive, it is best to first approach your retention compensation by framing it as a small portion of the benefit the company gains by your agreeing to retention. Framed this way, the company gets a significant potential pay-back if it succeeds in getting you to agree to retention.
For example, if the Company is nearing a certain milestone, a key condition to their closing a $10 million A round of financing within 3 months, and that your role is so important that if you leave it might take them a year or longer to recover from your loss, then if you seek a retention package valued at $700,000, with the majority of that value paid only after the round closes, the Company could certainly visualize a significant pay-back (over 10 to 1) to pay the retention to compensation to keep you in place over this critical period.
This will also vary depending on the length of the retention period. If the retention period is sufficiently short that you can defer and still take the other opportunity, then you could reasonably ask for much less in the retention compensation. On the other hand, if the retention period is such that you must give up the other opportunity, then the retention compensation must include considerations to make you whole for what is given up.
The key idea of retention compensation for you is that you have been working a period of time for the current company and built a level of value there. The retention agreement in the right circumstances clearly benefits the company but also enables you to cash in and take for yourself a portion of the value you helped create, rather than just leave it behind. In the example given, you may have worked a number of years to position the company to achieve this milestone within three months. Thus, before you leave foe a new attractive position, you could explore whether your current company would offer a retention that would essentially give you a share in what you had built up for them, if you were willing to stay until the milestone is achieved, and defer or give up the other opportunity.
What to seek in your retention agreement
In determining what to seek in your retention agreement, one place to start is with a “revisit” to earlier issues from your original executive employment negotiations. This is especially useful if at the time you took the position, you were not in especially good bargaining position or lacked proper executive employment counsel at that time. Now, you have proven yourself and your bargaining position is strong. Thus, the company should now be willing to concede on many of the issues on which they would not budge when you were hired.
But in the retention context, you should not limit yourself just to the original asks. As CEO or senior executive with one or more years with the company, you are now an insider with much more knowledge of the company’s financial position and prospects. You also have a sense of the value your continued presence brings to the company.
Your right retention package should include many of the following elements:
- Retention signing bonus and salary raise
- Revisions to determination and level of executive’s bonus
- Grants of base and incentive equity, with the right mix of RSUs, restricted stock, ISOs and non-qualified stock options, structures to reward loyalty and results and allow tax favored capital gain tax treatment to the extent possible
- Revisions to severance terms to allow you a single trigger of severance if terms on which you relied are not met
- Revisions to severance terms to pay not only base pay or a multiple of that but to also make you whole on bonus, benefits and equity
- Provisions to provide the total executive compensation package shall avoid or minimize to the extent possible an excise tax exposure under IRC 280G (parachute payments) or 409A (deferred compensation)
- Revisions to terms on outside Boards and consulting, as well as non-competes and other restrictive covenants to ease your ability to take the next offer after the retention period concludes.
Benefitting both sides & best positioning you to move on
In seeking these elements, your presentation should include an analysis of the total cost of your retention package and a demonstration of how this package is only a fraction of the economic benefit the company is likely to derive if the package is offered and accepted as the company can retain your services over the critical period in question.
Working with the right executive employment attorney or other skilled advisor, in the right situation, you may be able to achieve a retention “win-win” that truly helps your current company and rewards you well for your cooperation. The right retention agreement will also well position you for your next executive job offer. But when that happens, you will know you left nothing on the table from your past company.
Representative cases by Executive Employment Attorney Robert Adelson:
- CEO of a Massachusetts medical products manufacturer – change of control
- Senior Vice President of Massachusetts financial institution – retention and severance agreements
Contact an Experienced Retention Agreement Attorney
As an executive retention agreement attorney, I assist C-Level and senior executives in retention and change of control situations making arrangements that protect them from harm and enable them to share in the benefits when corporate changes occur or are expected to occur. Contact me, a Massachusetts executive employee lawyer, at firstname.lastname@example.org or call 617-875-8665.