Acquiring Archives

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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“How to request ‘ownership interests’ from Private Equity employers.”

Published on September 3rd, 2014 by Alan L Sklover

Question: My husband has been offered a position in another state. The company owners are what is called “Private Equity,” and as almost all “Private Equity” owners, they are looking to grow revenue by 30% in 3 years, and sell the company in 3 to 5 years. Their plan is to offer new services that my husband will develop for them. 

In the informal discussion around compensation they did not mention any kinds of ownership. However, ownership of a piece of the company – or at least the division he develops – is a must for us to consider this venture. 

This will be our first time negotiating ownership. My husband wants to be knowledgeable and prepared when he brings up the subject of ownership. Where do we start?

Corvallis, Oregon 

Answer: Dear Maggie: From my perspective, your husband is in a “good spot,” meaning that he has a skill that someone seems quite eager to use, and is asking him to take a big gamble – leave his present job and leave his family’s hometown. That should be a source of great pride for him, and a potentially great opportunity, but also a source of anxiety that it not be done carelessly. Let’s see how I might be able to help.

1. First and foremost, in his communications, discussions and negotiations, your husband should stress his great value, impress with his unbounded enthusiasm, and express his dedication to making this venture a success. The first “rule” of workplace negotiation is to create or enhance in the mind of the employer a strong perception of your value to the employer. So, your husband should make sure that the Private Equity owners know – and hear from him – such things as “I am confident I can increase revenue by even more than 30%,” “I can’t wait to get started,” “I’ve got lots of great ideas,” and “I view this to be an opportunity and adventure of a lifetime.” Skill, enthusiasm and vision in an employee are incredibly powerful motivators for employers, indeed, they are almost irresistible.

2. Second, your husband should stress that he can more likely achieve – if not surpass – those lofty goals if he is “in the same boat” and motivated in the same way as are the Private Equity owners – by the significant rewards of an eventual sale. Private Equity owners of companies engage in their efforts with one major goal in mind: selling the company in 3 to 5 years, at a large profit. That is their driving motivation. Your husband should share with them that he is “one of them” at heart, and is just as excited as they are, and motivated by the same things, too. It is what negotiators, strategists and motivational experts call “alignment of interests,” and in workplace negotiations is usually an “easy sell.” After all, don’t we all think that others should think and feel as we do? The unspoken message is “I am one of you, and I want to be treated that way, as well.” 

This is a strong rationale – “In order for me to do my best for you, I need you to do your best for me.” Again, it mentions the other guy’s interests before mentioning your own, which is supremely important in negotiating.

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3. Third, your husband should stress that the very substantial risk he is contemplating taking – leaving a job where he is secure and taking his family from their home town should entitle him to some ownership interests, or as they are frequently called, “equity.” In business as in other areas of life, we pay a premium when we want others to take risks for us. That is why and how we buy life insurance, auto insurance, homeowners insurance, health insurance, and even flood insurance: we are asking someone to assume a risk for us, and in return they ask for a “reward,” or to use a more precise word, a “premium.” 

So, too, can it be presented in a truly business-like fashion, “If you want me to take a very significant risk, or several risks, there must be a very significant reward in order for me – and my family – to do so. Trust me, the Private Equity employers will fully understand and appreciate this line of reasoning.

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4. There are four elements of an “Equity Ask” to submit to a Private Equity employer that your husband should bear in mind. Although I cannot in this answer to you delineate and describe all of the words, phrases and provisions to ask for – and to watch out for – when making an “Equity Ask” to a Private Equity employer, but there are four elements he should include when he does make his “Equity Ask” request:

(i) Same Class of Ownership Interests as Senior Management: To put it simply, if the company’s CEO, COO and other “c-suite” executives are being given Class K stock, Class W Units, or Class X Interests, then your husband would like to be awarded the same class of stock, units, or other forms of “equity” as they are. The idea is this: these others are highly valued people, and presumably pretty good negotiators, themselves. Chances are your husband will not be able to get a better kind of ownership interests than they did, and at the same time – considering his importance to the venture – he deserves nothing less.

(ii) Relative Number to Others: When people write to me and say, “Is 100 shares a good offer of ownership or equity?” I must answer “I don’t have the foggiest idea.” If others each received 100 thousand shares, then 100 does not seem that good. When negotiating a bit in the “dark” as to the number of shares or units your husband should receive, a number like “no less than 50% of the number of Units (or Shares) the Chief Marketing Officer received, or will receive” is a much better idea. 

(iii) No Less Favorable Terms and Conditions: When do the ownership interests vest? Might they be diluted by the issuance of 10 million additional units? Are they forfeited if the employer terminates your employment without there being “cause” to do so? Here, too, we are wise to consider that others “near or at the top” of the company probably received about the best set of terms and conditions as anyone can get. So, we ask for “no less favorable” terms and conditions of all kinds as the “top dogs” received – or might receive in the future – even if new managers are brought on board later, as it is quite common that “big names” are hired to carry forward any company sale or initial public offering.

(iv) Continued Vesting if Terminated Without Cause: What good does it do for an employee if the “ownership” gained through negotiation and hard work is later lost by a termination without “cause” months, weeks or even days before the sale of the business in 3 to 5 years? I do not want to disillusion anyone, but I have seen that happen several times by employees working for Private Equity-owned employers.

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5. When dealing with Private Equity employers, Employment Agreements, Ownership (or “Equity”) Agreements, and Limited Liability Company (“LLC”) Agreements all need to be carefully reviewed by an attorney with considerable experience in this area. One last thing to look out for is the absence of simplicity and clarity in the agreements that lawyers for Private Equity-owned employers tend to draft. In no other area of my law practice over the last 30-plus years have I seen such ambiguity, uncertainty, “potholes,” pitfalls, and even sometimes outright chicanery as I have seen in this context. 

I sometimes say to myself when reviewing such materials, “I can’t believe the way these attorneys are trying to give their Private Equity clients ‘wiggle room’ that can – and often does – be used to hurt the hard-working employees whose hard work make the Private Equity owners an awful lot of money.” It calls to mind the refrain in an old Tom Waits song, “The large print giveth, and the small print taketh away.” 

That said, I have also seen many employees do all the right things, and “win and win big” as a result, if they: (a) acquire the information and insight they need, (b) make their requests known in the right, reasonable and respectful way, (c) “stick to their guns” and decline to accept job offers from such employers without equity and some good legal protections, and (d) not permit themselves and their families to be taken advantage of in this context. This is a sure recipe for success. These opportunities are considerable, and “the world belongs to those who persevere.” And, I hope such success is what you and your husband will come to enjoy. 

Maggie, you and your husband are quite wise to “look before you leap,” and I commend you for making the effort to learn what you need to know before you go forward. As an advertisement for a men’s clothing retailer used to say, “An educated consumer is our best customer.”

My Best,
Al Sklover 

P.S.: If you would like to speak with me directly about this or other subjects, I am available for 30-minute, 60-minute, or 120-minute telephone consultations, just [click here.] Evenings and weekends can be accommodated.    

  Repairing the World,
One Empowered – and Productive – Employee at a Time™

© 2014, Alan L. Sklover All Rights Reserved. Commercial Use Prohibited.

“In-The-Meantime” Clause – This is One to Remember, and Request

Published on November 8th, 2013 by Alan L Sklover

You can’t do better than to expect the unexpected.

“Nothing is so certain as the unexpected.” 

-       English Proverb

TWO ACTUAL “CASE HISTORIES”: Melinda was a 32-year-old family practice physician recruited to leave her home and practice in the suburbs of Boston to join a large family-medicine practice in southern Maine. As is so often the custom, she was told that after two years of practice, provided her skills and demeanor were found to meet the practice’s standards, she would become a Partner in the practice, with a 15% ownership stake.

Melinda had no qualms about the deal. First, she was entirely confident she would meet all criteria for becoming a Partner in the practice. Second, it was spelled out entirely clearly in her contract, and her brother – an experienced attorney – said “It could not be clearer.” Third, the practice was a growing one, and her 15% ownership would surely “set her up for life.”

Then, 18 months after Melinda joined the medical practice, something entirely unexpected happened: a corporate health service headquartered in Boston made a very significant offer to purchase the family medical practice in order to merge it into their growing network of family medical service centers throughout the northeast U.S. The physician-partners all sold their shares in the medical practice for a handsome price, and were offered long-term jobs afterwards.

Melinda? Because she had not been a physician in the practice for two full years, she got nothing. She was not even offered a job by the corporate health service. It all came to be a very large loss to her – and a serious setback in her life plans.

Something very different happened to Howard, a 31-year-old hedge fund trader at a small hedge fund in St. Louis. After leaving a large Wall Street firm, he joined the hedge fund in large part because he was offered ten percent (10%) of the firm stock if he remained with the firm for two full years. Like Melinda, Howard saw it as an opportunity to become an “owner,” and to establish himself for the long term.

Fortunately for Howard, we assisted him with his contract of employment that provided him with his ten percent (10%) ownership interest. We insisted on what we call an “in-the-meantime” clause that provided that, if anything happened “in the meantime” to prevent his receipt of fully vested stock due to no fault of his own, in all events Howard would receive the stock or its equivalent in value in cash.

Sure enough, when Howard’s small hedge fund merged with a large hedge fund headquartered in Chicago, the owners received a hefty purchase price. Howard’s stock did not get a chance to vest, so he would likely lose out completely, as Melinda did. In Howard’s contract, though, his “in-the-meantime clause” saved the day. Because it was there, Howard received the same purchase price as if he had owned the stock.

LESSON TO LEARN: An ounce of “in-the-meantime” forethought is surely worth more than a pound of “I wish I had thought of that,” or even a ton of “I can’t believe what just happened.”

If, in your employment negotiations, you are being offered a “thing of value,” but must wait to receive it – whether it is elevation to a partnership, an annual bonus, vested stock or stock options, a promotion, or a coveted sales territory, just to name a few – insist on an ‘in-the-meantime” clause to provide that, if for any reason other than your own misconduct you don’t receive it, you will be given either its monetary value or an alternative, but no less valuable “thing of value.”

Chances are you will never need it. But, if you do, you sure will be glad you have it.

WHAT YOU CAN DO: So many of our clients have requested, and received, “in-the-meantime” clauses in their offer letters, employment agreements, relocation agreements, retention agreements, and other work-related contracts. While few have ended up needing to exercise their rights under their “in-the-meantime” clauses, those who have done so have been just thrilled to have the “safety net” they provide. Here are five things you can do to help yourself in this regard: Read the rest of this blog post »

Cashless Exercise – Key Words & Phrases

Published on October 19th, 2013 by Alan L Sklover

Key Words

What is the meaning of:


A simple definition of “cashless exercise” is “to purchase stock or exercise stock options without spending any money.”

Many employees are awarded the right to purchase company stock at a discount, or are given stock options as part of their overall compensation packages. Often, though, they don’t have the available money or other resources to take advantage of this opportunity.

There are three ways to purchase employer-awarded stock, or exercise employer-awarded stock options: (i) with cash, (ii) by stock swaps, and (iii) through “cashless exercise.”

Cash Exercise: This is the most straightforward path. The employee simply writes a check, and is then given the stock. Couldn’t be simpler, IF, that is, the employee has the available funds to do so.

Stock Swap: This is simply trading company stock you already own for the new stock you are offered at a discount. Since the stock you already own is worth full price, say $100 a share, and the exercise price of your stock options is, say $25 a share, by means of a stock swap, you can get 4 shares in exchange for every one share of company stock you presently own. (Sometimes called a “stock-for-stock exercise.”)

Cashless Exercise: Let’s say you have no cash or stock available for either a Cash Exercise or a Stock Swap, yet you really want to take advantage of stock options you own, especially if they have value and are soon to expire.

In a Cashless Exercise you (i) borrow the money needed to purchase the company stock or to exercise your stock options from a stock broker, (ii) purchase the stock or exercise the stock options, and then (iii) simultaneously or immediately sell some of the shares you now own to raise enough cash to repay the stock broker’s loan to you, as well as any commissions and applicable taxes.

Many companies that give their employees stock or stock options set up programs with brokers to facilitate “cashless exercise,” which has become the most popular method for employees to exercise company stock options.

If you have the right to purchase discounted stock or exercise stock options, but lack the available financial resources to do so, don’t overlook “cashless exercise.” It is a useful tool to secure a potentially valuable opportunity at work.

For more information, insight and inspiration regarding Stock, Stock Options and Equity at work, just [click here.] 

© 2013 Alan L. Sklover. All Rights Reserved. Commercial Use Strictly Prohibited

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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