Private Equity Employment Archives

“Umbrella Negotiating” – Best Response to Private Equity “Hurricane Tactics”

Published on February 5th, 2019 by Alan L. Sklover

Umbrella Negotiating Sklover Working Wisdom

 
“I am no longer afraid of the storms for I am learning how to sail my ship.”

– Louisa May Alcott

ACTUAL CASE HISTORIES: Kalisha, 44, had worked for six years as the Financial Controller of a St. Louis-based, family-owned lighting distributor. After three generations of family ownership, during which the staff grew from two to 150, the grandchildren-owners received an inquiry from a Private Equity firm about their interest in possibly purchasing the company. With assurances that each grandchild would likely make many millions of dollars when, three to five years later, the “re-invigorated” company was to be sold. It didn’t take long: they decided to “cash out.”

Pretty soon, the Private Equity firm, their lawyers and their accountants began reviewing the company’s financial records, bank statements, leases, employment agreements, all as part of their “due diligence,” upon which their formal “offer” would be based.

It did not surprise anyone when the company’s owners called for a meeting of the company’s executive team to announce what was happening. At that meeting, the overall message was clear: “This is a great opportunity for everyone. There will be bonuses, there will be stock ownership, and this will be a golden opportunity for everyone . . . So long as you stay on board, work hard, help make the company a greater success, we might just make enough money to never work again.” Wow.

Then, four months later, without warning, the management team were called into a conference room, given documents to review, and told they needed to be signed by the next morning. Each executive received six documents, some one page long, some tens of pages long, each nearly impossible to understand due to their dense legal wording, multiple definitions, and confusing cross references. When some people asked for a chance to have their attorneys look them over, they were sternly warned, “What are you going to do? Don’t you trust us? Don’t ruin this for everyone.” To make a long story short, everyone signed, and no one ended up happy.

As Private Equity investors increasingly assemble “private equity” – meaning investments from college endowments, individual investors, pension funds, and religious organizations – this scenario is playing itself out scores of family-owned companies each day.

LESSONS TO LEARN: The commonplace understanding of employment agreement negotiation is a rather simple, three-step process: (i) first, the employer provides the employee with a draft document; (ii) then, the employee and his/her lawyer look it over, (iii) finally, the employee’s lawyer and the employer’s lawyer discuss, and negotiate, mutual concerns. With few exceptions, that is not how Private Equity investors and owners operate today with companies they purchase in order to sell.

With few exceptions, Private Equity investors (a) buy, (b) change, and (c) resell companies over three to five years. They are not long-term investors. They seek the best possible return for their investors and themselves, and do anything and everything they can think of to do just that.

The problem is this: to do so, they often promise the sky, and make sure the “papers” provide little or nothing of that. Instead, they tend to (a) reduce employee overhead (meaning salary and benefits), (b) manage to avoid paying out “suggested” promised bonuses and stock or other forms of equity, and (c) make sure that the agreements that they require employees to sign provide them the right to do just those things. Generally speaking, over time, they will bring in their own executives whose job is to sell the company, not to run it. They have no loyalties; they have only greed, and the legal help to get them what they want. Unless wisely resisted.

Do they want anyone to know or understand what they are signing? No. And they are good at it. Remember: (a) Buy, (b) change, (c) sell, within three to five years. And to do so they engage in what I call “hurricane tactics.”

“Hurricane Tactics” are what I call the use of seemingly overwhelming force, in an atmosphere of near-blindness, by among other things a “blizzard of papers,” so that the course of events proceeds this way: (1) rather vague assurances are made to employees of great opportunity and fortune, provided the employee agrees to remain and work hard for several years, however (2) without any solid commitments being made to ensure the employer fulfills those vague assurances. Instead (3) the agreements are chock full of provisions by which the employer is enabled to avoid and evade any commitments, of any kind, to the employee.

A. What are these “Hurricane Tactics?”

    1. Lack of Clarity: The use of words, phrases, definitions and dense, complicated language an experienced employment attorney has a devil of a time understanding. There is simply no good reason to draft legal documents no one can understand; only bad reasons. (See the next section: The documents almost always say, one way or another, that if there is anything unclear in the documents, the “Management” has full and final say about what it means);

    2. “Unlimited Leeway”: Provisions in the agreements that give to employers the sole, final and unreviewable decisions – like “sole and unreviewable discretion” – as to what a document means, or what constitutes “reasonable,” “promptly,” “bad faith,” “adequate performance,” “cause” and “misconduct,” to name just a few, making those words and phrases essentially meaningless;

    3. “Subject-To” Provisions: Phrases that make the employment-related agreements “subject to” other documents that are not provided for review, such as the Limited Liability, LLC Operating, or Shareholders’ Agreement. Others, such as the “Award Agreement” for stock or options are often not even drafted yet. “Subject to” means that this document is subservient to other documents, and that those other documents govern and control in the event of any inconsistency, conflict or dispute. But it is almost always the case that you have no right to change those other documents, and they do, without telling you. (See the next section.)

    4. “Incorporation by Reference” of Other Documents that are Changeable Unilaterally: As examples, the three agreements noted in the preceding agreement are controlling, and each of them provide that they can be modified at any time, without notice. So, if an employee is provided 2% of the company’s shares, these documents can permit 10 million new shares to be sold, making the employee’s ownership not 2% of the company, but 0.00002 percent. So these “incorporated by reference” documents can make the one you are signing essentially meaningless.

    5. Coercion by Last-Minute Lateness (“Don’t be the one who spoils this for everyone.”) Perhaps most cynical of all, the practice of providing the employees only a day or even just hours, to review several documents consisting of hundreds of pages, and no real opportunity to even find or retain an attorney, to request changes or otherwise negotiate.

In one instance, my client was given only 30 minutes to sign several documents, and only the signature pages of the agreements were given to her to sign; the substance of the agreements were not provided, so she had no idea what she had agreed to. For Private Equity investors, that means “Mission Accomplished.”

So, those are the fundamental elements of the “wind-in-your-face, rain-in-your-eyes” hurricane tactics. Is it possible to successfully negotiate against these “Hurricane Tactics?” Yes, it is, and I’ve found the best way is to use what I call “Umbrella Negotiating.”

B. So, What is this “Umbrella Negotiation?” Simply, focus on two things: (i) Firm Footing (what I call “Positional Leverage”) and (ii) one Document that Covers Everything (an “Umbrella Memo”). By those phrases, I mean the use of two concurrent strategies, (i) “positional leverage” before the hurricane arrives, and you are exposed to its unsettling and disorienting “elements” and (ii) preparation of one single – and rather simple – document that covers you regarding all other documents, in all events, just as a strong umbrella does in a hurricane.

“Positional Leverage” and “Umbrella Memos” are explained in greater detail below. Simply put, for now, it is being on your firmest footing, and projecting your points in the negotiation as soon and as clearly as you can.

“Umbrella Negotiation” serves to hold back the strong wind, protect against the furious rain, and permit you to both see what is going on around you, and to stand up to it, not getting overwhelmed, drenched or “hosed.” The elements of “Umbrella Negotiation” are explained below.

Is it easy? No, but with a little effort and energy, it’s not impossible, either. Is it effective? Yes, it can be very effective, and I truly believe it is the most effective way to address Private Equity “Hurricane Tactics.” Just as David defeated the more-powerful Goliath with a firm footing and a single, simple weapon, so too can you prevail in employment negotiations with Private Equity investors or owners.

WHAT YOU CAN DO: These are the “Umbrella Negotiating” steps that I employ in these circumstances and they are in my experience the most effective way to negotiate employment agreements of nearly every kind:
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Carried Interest – Key Words & Phrases

Published on April 13th, 2016 by Alan L. Sklover

Key Words

What is the meaning of:

CARRIED INTEREST?

“Carried Interest” (sometimes called “Carry”) is a term used to refer to one of the fees an investment manager may receive. It is a share of the investment’s profits, over and above any share of the investment profits that the manager may be due from the manager’s own initial contribution to the investment.
It is really a kind of “performance bonus,” because the greater the investment’s profits, the greater the manager’s “carried interest” is worth.

The term “carried interest” originated in the 1600’s, when a ship captain was awarded a percentage of the ship’s “carried” cargo for completing a successful sea voyage.

In “private equity” investments, the investment manager receives “carried interests” when the investment is completed, generally when the investment is sold.

In “hedge fund” investments, the investment manager receives “carried interest” at the conclusion of a year, determined by a percentage of the year’s profits.

Employees of investment management firms may be awarded a small share of the firm’s “carried interests,” to be vested over time, the way that other long-term incentives are awarded. It is a variant of stock, stock options and other forms of “equity” awarded by traditional investment firms. Like “equity awards” in traditional investment firms, “carried interests” often vest over time.

If you are offered “carried interests” by an employer, your “carried interests” may well come with “strings attached” in the form of non-compete agreements, requirements that you invest your own money at times, even forfeiture and “clawback” provisions that take your awards away from you if you fail to fulfill your obligations.

The “paperwork” involved really does need to be carefully reviewed by an attorney experienced in these matters. The rewards are potentially great, matched only by the risks involved.

On these and other workplace issues, I am available for telephone consultations lasting 30 minutes, 60 minutes, or 2 hours. If you would like to set up a consultation, just [click here.]

© 2016 Alan L. Sklover. All Rights Reserved. Commercial Use Strictly Prohibited

Offered a Position and Shares in a Start-Up? – 10 Traps in the Legal Papers, and Your Ways Out

Published on March 9th, 2016 by Alan L. Sklover

“The spirit of our verbal agreement was true partnership, but
over time it morphed into this one-sided employment arrangement.”

– Actual Client Comment

ACTUAL CASE HISTORY: Kent was the Senior Editor of a major sports-related magazine. He was recruited away by a competing start-up publication, induced to leave his employer of many years by a promise of great wealth to be achieved through his becoming a minority shareholder of the new or young company. Kent gave the new magazine credibility, and for joining he was offered a large number of “Class B” interests in the company.

“When we are sold, or go public, you will become quite, quite wealthy” he was many times told by the start-up’s founder and investors. That was repeated so many times that Kent had already begun to consider where he would purchase his retirement dream, a horse farm.

Through an heroic contribution of energy, imagination, devotion, daring and perseverance, Kent helped the new magazine take significant market share away from larger, more-established competitors. He treated the new magazine as “his baby.” On a salary lower than he was used to, and minimal benefits, he built quite a powerhouse in just a few years. Sure enough, the magazine had attracted great interest, and a communications consortium came forward seeking to purchase the company that owned the magazine. For Kent, however, that was the beginning of his problems.

It all started with a casual management meeting that devolved into a discussion of Kent’s poor judgment, and then an announcement that Kent was being let go. It got worse when he learned that, because he was being let go, he would lose all of his unvested stock. Still worse, he found out that the company had a right to repurchase his vested stock for just $3,000. A third type of stock Kent had been given as a bonus had been so “diluted” by the company issuing 10 million new shares to investors that his remaining interests were worth about $45.00. Finally, he was reminded that the original documents he signed provided that Kent could now not work in the magazine industry for the next 24 months.

No job. No stock. No future. The dream had, somehow, turned into a nightmare. When Kent protested that this was not consistent with the spirit of the deal, he was simply advised, “Speak to your lawyer . . . the one who let you sign those papers.” That is when Kent called us – and not his previous lawyer – to try to salvage the situation.

More times than I can count,: someone contacts my firm and says, “I am being offered a new job. As part of the compensation package, they are offering me shares or units in the new or young company. Can you help me?” My answer is always, “Sure, I have done that many times.” A more candid answer would be “Sure, I have done that many times. However, it’s not an easy thing to do.”

“Why?” you might ask. It is not easy because lawyers for business founders or owners – particularly “Private Equity” owners, almost always make it difficult, and intentionally so. They do so in three basic ways:

First, by purposeful confusion. That is, by preparing three or four different agreements that, together, constitute one offer: (1) one that pertains to employment; (2) one that pertains to non-competition agreements, (3) one that pertains to company self-governance, itself, and (4) one that pertains to earning, vesting and possibly losing ownership interests. It’s a lot of words, a lot of pages and a lot of jargon. No single employee can understand it all. It is quite rare to find an attorney who has experience in each field. In this way, the key points – and real risks – get buried.

Second, through dreams of sugarplums. As the saying goes, “The large print giveth, and the small print taketh away.” Said a bit differently, the potential rewards are highlighted, while the likely risks are made quite difficult to spot, and even more difficult to remedy. Thus, clients begin to count their eventual wealth, which naturally blinds them.

Third, with complexity of cure. When you have three of four separate agreements, often in different typefaces, often without page numbers, always with different paragraph numbering systems and – most complex of all – with hard-to-understand, almost irrational definitions of words and phrases.

There are just too many ways, in too many different places, that the risks are effectively hidden, and the rewards are potentially forfeited. It is something akin to the game of “Whack-A-Mole,” where every time a mole appears from the ground, and you whack at him, another mole pops his head up from another mole hole.

In no other part of my practice of decades have I seen more “bait and switch” than I have in this context. The employee must make life changes and agree to restrictions NOW in return for a mere PROMISE of something to be delivered later, which “something” may in all likelihood never come to be, or if it does come to be, is perhaps 1/1000th as valuable as originally suggested.

LESSON TO LEARN: The task before us is tough: making real – at least likely – the dream opportunity, which by the legal papers has been diminished, made unlikely, and often turned into a nightmare reality by confusing, confounding and complex legal drafting. One thing the legal drafting is not is accidental. Rather it is quite intentional. That is the one thing I can guarantee you.

No matter how difficult the task at hand may be, you are so much more likely to be successful in it if you know what you are doing. Thus, by knowing the essential deal points in this context, and knowing how to address them, can only be helpful.

So long as your requests for change in the legal papers is respectfully presented, reasonable in magnitude and accompanied by a rationale – that is “I want to join you. I just need some things made clearer before I can comfortably come aboard.”

Simply signing what is before you, and hoping that you will be treated “fairly,” is not something that I have seen work out well for employees. And, too, you owe it to yourself and your family to try to avert calamity in your quest for that pot of gold. Here’s how:
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“Forming or Joining a Start-Up? – 16 Questions that Need to Be Answered”

Published on January 6th, 2016 by Alan L. Sklover

“Assumptions are the termites of relationships.”

– Henry Winkler

ACTUAL “CASE HISTORY”: Jessica, 36, was more than excited. After five years as Assistant Director of the digital division of a fashion design company, she had been approached by Martin, a colleague she knew from a previous job, about a new opportunity.

Martin was putting together a new venture that would contract out the services of tech-savvy graphic artists, visual designers, and computer coders to corporate app and website developers. Jessica saw the idea as a very good one, as she knew there was a need for such a firm from her work, and to her knowledge no one else seemed to be filling the need on a national level. More than once she had thought to herself, “Someone ought to do that.” Martin had financial backing for the venture from a hedge fund owner, and thought Jessica would be the very best person to help him put together and run the start-up.

What most intrigued Jessica was the opportunity to be a part owner of the new company, something she had often thought about but that had never before come her way. As Martin presented the idea, Jessica would have the opportunity to earn over time up to twenty percent (20%) ownership of the new company.

After discussing it with her husband, and meeting with Martin and the start-up’s financial backer, Jessica decided to “take the plunge.” She was presented with a set of papers that seemed quite simple. She was told that “formal documents” would later be prepared. In the meantime, Martin assured her, they would get things rolling and attend to the “details” later.

After leasing a small office space, hiring office staff and assembling an initial sales team, Jessica and Martin were ready to roll. As anticipated, Martin would be in charge of sales, and Jessica would be in charge of administration. Soon after, the difficulties began.

Martin expected to receive a much higher salary than Jessica would receive; Jessica presumed they would be equal. By happenstance, Jessica learned that Martin would be receiving a forty percent ownership stake, double her own, which did not sit right with her; she presumed they were to be equal partners. The company’s accountant was a cousin of Martin’s, and seemed to answer Martin’s questions, but was always unavailable to answer Jessica’s.

One of the documents that Jessica was given to sign contained a non-compete provision that provided she could not work in this industry for a full year if she was ever to leave, or be asked to leave. Jessica was truly shocked to learn that Martin remained employed by his former employer as a consultant, and so was not devoting full time efforts to this company. Each week seemed to present Jessica with another reason to question the wisdom of her decision to join.

After seven months, Jessica “threw in the towel.” She retained our firm to help her achieve fair separation terms, which proved to be more complicated than expected, and even grew adversarial over time. It was especially difficult to get Jessica’s name removed as a guarantor of the office lease obligations. To make a long story short, Jessica was happy to end the dream, which for her had become something of a nightmare.

LESSON TO LEARN: Forming or joining a start-up company is almost always exciting and exhilarating, but can also be quite disappointing. Creating a new business is difficult, but doing so with others requires more communication, focus, attention to detail and patience than most people imagine. It’s just so easy to get caught up in the enthusiasm.

It’s hard to apply cold reason to hot passion, but it is an exercise in discipline that is highly recommended, especially by those who did not do so, and sure wish they did. Here are the 16 questions I suggest you try to answer if you decide to form or join a start-up.

Every business has its ups and downs, but start-ups have them more commonly and more intensely than established firms. These 16 questions are geared to prospective founders and partners of start-ups, but are also applicable to “early stage” employees, hired after the start-up has gotten going, especially if they are told one day they might become owners by vesting in shares.

WHAT YOU CAN DO: Whether you are forming a start-up with one or two others, or being hired by a start-up, with a suggestion that one day you may become one of the shareholders, you need to ask these questions to understand what you are getting into.
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“Private Equity Buying Your Employer? Resist These 11 Employment Negotiation Tactics”

Published on September 16th, 2014 by Alan L Sklover

“Some people, when they learn that two wrongs don’t make a right,
try three. ”

Author Unknown

ACTUAL “CASE HISTORIES”: For many years I have counseled and negotiated on behalf of employees when their employers (a) are being purchased by Private Equity investors, (b) are owned by Private Equity investors, and (c) are being sold by Private Equity investors. I’ve also represented employees being recruited to work for Private Equity-owned employers, commonly referred to as Private Equity “Portfolio Companies.”

In the course of those efforts I believe I have learned a thing or two about the nature of Private Equity-owned employers, and the tactics they commonly use in employment negotiations. And, though I am a few years younger than he was, as Michelangelo said at age 87, “I am still learning.”

Sure, every Private Equity investor and every Private Equity Portfolio Company is unique. And, too, you can’t paint tens of thousands of people with one broad brush. That said, there are certain commonalities and cultural norms to be found in certain industries, and certain lessons to be learned in reflecting on one’s experience over decades.

On the basis of those decades of experience, I’ve assembled this list of “Eleven Employment Tactics of Private Equity-Owned Employers.” I present them to you in the hopes that, for you, “forewarned is forearmed” (although I have never seen a person with four arms – just kidding!)

I present these thoughts to you so that you are better able to see what is likely coming your way, and more capable and confident in navigating and negotiating your way to success and security at work – the foundational purpose of SkloverWorkingWisdom.™

LESSON TO LEARN: Is it any wonder that Private Equity investors – whose job it is to (a) locate a company to purchase, (b) purchase that company, (c) reduce its costs and increase its sales, and then (d) sell that company, (e) all with one purpose in mind – to make as much money as possible for themselves and their investors – tend to conduct themselves in similar ways? It should not be surprising at all.

Likewise, it should not be surprising at all that those with a short-term perspective, who engage in the buying, exploiting (in all senses of that word), and selling companies tend to act with short-term objectives in mind, not concerned with the long-term consequences of their actions on employees, communities and other stakeholders. Why worry about the long-term effects of your actions on employees, communities and customers, when you won’t be around more than three to five years? After all, “no one changes the oil in a rental car,” now, do they?

As employers of their “Portfolio Companies,” Private Equity managers do all they can to (a) lower overhead, and (b) maximize the company’s eventual sales price – for themselves and their investors. They don’t work for, get paid by, or care much for, others. With one goal in mind – “R.O.I., or Return On Investment” – why would anyone expect anything different?

Know who you are dealing with, and keep a sharp eye out for the “sharpie” Private Equity investors who are quite convinced that their access to large amounts of investment capital is a sure sign that God has anointed them as a segment of the human race above all others.

These 11 employment tactics that Private Equity investors use when purchasing part or all of employers are to be watched out for and to stood up to, as best you can. While there is no guarantee that you will be successful in negotiating with a Private Equity manager, or in resisting the changes they will inevitably insist upon, the more you know the better you will do. That is guaranteed.

Below we present 11 employment tactics of most Private Equity-owned employers, and the best steps we have found to resist their impact. As noted below, one thing you might do, right away, is to consider changing employers, or at least testing the waters, because that is your ultimate response to these tactics: seeking employment elsewhere.

WHAT YOU CAN DO: Keep a sharp eye out for these 11 Employment Tactics of Private Equity Investors: Read the rest of this blog post »


Alan L. Sklover

Alan L. Sklover

Employment Attorney
and Career Strategist
for over 35 years

Job Security and Career Success now depend on knowing how to navigate and negotiate to gain the most for your skills, time and efforts. Learn the trade secrets and 'uncommon common sense' of Attorney Alan L. Sklover, the leading authority on "Negotiating for Yourself at Work™".

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