Losing Archives

“On FMLA. Don’t want to return, but want unvested stock. What can I do?”

Published on December 4th, 2014 by Alan L. Sklover

Question: I am currently out on Family Medical Leave Act (“FMLA”) to help my mother who is sick. I do not want to return to work after my leave time is over. However, I have a significant amount of stock that vests on December 31st and I don’t want to sacrifice this significant payout.
At the same time, I don’t want to burn any bridges.

If I give two weeks notice on December 22nd, which means my last day is January 5th, and my employer instead stops my employment immediately, is my last day of employment December 22nd or January 5th?

Thank you!

Don’t Want to Lose Out
Nashua, New Hampshire

Answer: Dear Don’t Want to Lose Out: You are wise to try to keep what was awarded to you for past service, and to do your best to plan your departure so as not to leave empty-handed. Your thoughts are on-target. Here’s my answer, along with a few other things to think about:
Read the rest of this blog post »

“Can a severance agreement require that my husband give up vested stock and stock options?”

Published on September 19th, 2013 by Alan L Sklover

Question: My husband was just laid off due to a “cash crunch” at his employer. 

His offered severance package includes language waiving all stock and stock option claims. He had a large amount, some of it already vested. Also, the company was recently recapitalized before his termination, and he was also due stock in the new company. 

Can they legally require him to give up his vested rights?

Tamara
Escondido, California

Answer: Dear Tamara: You are on the horns of a dilemma, and I’ve been there, myself. Your question is one I remember asking myself several times when I was a younger, less experienced attorney. As is more fully explained below, your husband’s employer cannot “force” him to give up, or take, anything – even vested stock or stock options (often referred to as “equity”) – so the law is somewhat irrelevant in this respect. Also, the agreement presented to your husband may, or may not, express what you think it does. Let me explain:      

1. Severance is a purely “voluntary” transaction on both “sides,” and so either “side” can propose any terms, no matter how rational or irrational, fair or unfair, sensible or nonsensical. Although it is often overlooked, no employer has to offer severance, and no employee has to accept the severance that is offered. So, for this reason, any terms and any conditions can be proposed by an employer, no matter how irrational, nonsensical or foolish they might be; and, too, an employee can put forth an equally irrational, nonsensical or foolish counter-proposal, as well.  

Suppose, for example, I knocked on your front door, and said to you, “I’d like to buy your house. I offer you $100. And, by the way, I want you to give me your car too, for the $100 price.” You would probably say to me, “No thank you,” and to yourself, “Who in the world would accept that deal?” Well, it is sometimes the same way with severance: the initial proposal is just not worth accepting. While you are surely “vested” in the ownership of your house and your car, you just might – who knows? – agree to give them both up for $100. In fact, many downsized or laid off employees quickly accept “bad” initial severance offers. 

The law does not require that transactions – including severance transactions – be fair. While the law does not tolerate any transactions that are fraudulent, or that deny “statutory” rights to such things as overtime, minimum wage or forced labor,  the law does not protect people from their own foolish decisions. 

Navigating the severance experience can be confusing. We offer a 94-Point Master Severance Negotiation Checklist to make sure you don’t miss any severance-related issues or fail to spot problems in severance agreements. To obtain a copy, just [click here.] Delivered by Email – Instantly!  

2. In fact, I have seen numerous instances – like yours – where the terms that are in the severance agreement presented to a departing employee seem to “take away more than they offer.” Over the years, I have reviewed thousands of severance agreements for clients, and in many instances I have said to my clients, “It seems to me that this proposal requires that you give up more than you are being offered.” Or, sometimes I say, “Well, after taxes, the amount of money you are being offered is about $5,000, while the claims you will have to give up in order to get that $5,000 are worth at least $100,000. I don’t recommend you accept the offer.” At still other times, I have said, “The offered severance is $5,000, but to get paid that amount you must agree not to work in your industry for a full year; it sure does not seem worth taking the deal.”  

Sadly, due primarily to anxiety, most people don’t read their severance agreements too carefully, or have attorneys read their agreements for them, and proceed to simply sign any agreement that sounds like it will likely give them some money. 

3. At other times, the apparently unfair or irrational terms offered by the employer are the result of (a) misreading of the language in the agreement by the employee, or (b) sloppy drafting by the employer’s attorney or HR representative. In some cases when I have said to my client, “That does not seem to make sense,” we eventually determine that the client’s initial reading of the agreement is not correct, often because of poorly drafted words. At other times, when I have contacted the employer’s attorneys or HR representatives, and asked them, “Is that what you really mean?” they have responded, “Of course not; how could you think that?” 

It is for this reason that it is often wise to “suspend judgment” for at least a while until both (a) we can try to figure out the true meaning of the words, and, if necessary, (b) we can contact the “other side” to ask them whether they did, in fact, really mean what the words seem to say. Any delay, though, must not jeopardize missing any deadlines set forth in the agreement.

4. Often severance agreements (a) don’t mention stock or stock options, because the employers claim the subject is not relevant to severance, yet, at the same time, (b) severance agreements require waiver of claims regarding stock and stock options as part of the “general release” in the severance agreement. I have a feeling that this may well be what you and your husband may have astutely noticed. If so, you are wise to realize that this does, in fact, represent a substantial degree of risk of financial loss to you. If this is, indeed, the case, then you also need to review the Stock Plan and the Stock Option Plan for what they say is supposed to happen if an employee with “vested” stock and/or stock options is downsized or laid off.  

If the stock and stock option plans say words to the effect “You keep all vested equity,” you have every right to insist that, in the severance agreement it clearly says words to this effect: either (a) “You retain all of your vested equity,” or (b) “What the stock and stock option plans say will govern, and will survive the severance agreement and its release of claims.” 

I can’t counsel you from afar, but if the equity plans say you keep your vested stock and stock options, and the severance agreement does not clearly say you lose them, you are on pretty solid ground, and probably are “OK.” But, bear in mind, this is not legal advice.   

5. May I suggest your first step: Calculate (a) what it is your husband seems to have been offered, and compare that with (b) what you calculate it seems he might lose in terms of stock and stock options. Bottom line, if he is being offered $100,000 in severance, and he may lose $500.00 in equity, it’s not such a bad offer. On the other hand, if he is being offered only $500.00 in severance, but he could lose $100,000 in equity, it is definitely a deal to look at with great worry. This is the first piece of data you need to consider. 

6. Second step: Have an experienced employment attorney review the agreement for you and give you his or her view of what it says; with that new “data” in mind, you can make a better decision as to how to proceed. No matter what, it would seem to be a wise idea to have an attorney experienced in these matters review the agreement for you. Even with all of my experience reviewing thousands of severance agreements, I still sometimes ask one of the attorneys who work for me, “Please read this; I can’t figure out what it means. What do you think it means?” This is the second piece of “data” for you to acquire, and consider. 

If you would like to obtain a list of five or more experienced, “employee-side” employment attorneys in San Diego, near Escondido, just [click here.] Delivered by Email – Instantly! 

7. Third step: contact the employer’s representative and ask for either (a) their intentions on this point, or (b) their agreement to modify the words of the severance agreement so that it is crystal clear that your husband will not lose any stock or stock options if he accepts the severance. Third step: if necessary either retain the attorney to help you, or by yourself, contact the employer’s representative (attorney or HR). From your attorney consultation, you will know whether you will need to ask, “Are you sure you meant to express that all of our stock and stock options – even vested – are going to be forfeited if I accept the severance?” 

If they say, “Yes,” you have every right to try to negotiate that point in this way: “If I have to do that, I would rather not sign the agreement, but instead bring a law suit for what I deserve; instead of that, will you consider removing the offensive wording?”   

If they say, “No, we did not mean that,” then you have every right to respond, “Then will you express what you do mean more clearly in the severance agreement, so I don’t have to worry?” 

Tamara, I hope this has been helpful. Your concern is quite real, and the point you raise is a good one. Getting to the answer to your dilemma may require some work on your part: (a) gathering more “data,” (b) speaking with an attorney, and (c) doing some “negotiating” with your employer’s lawyer or HR representative. The great news is that you sure seem up to the task. I salute you for your careful reading, and your good question. Now, simply, “Go get ‘em.”

My Best,
Al Sklover

P.S.: Is your husband looking for a New Job? We offer a 152-Point Master Checklist of Employment Negotiation Items to help him. To obtain a copy, just [click here.] Delivered by Email – Instantly!  

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

© 2013 Alan L. Sklover, All Rights Reserved.

Clawback – Key Words & Phrases

Published on March 22nd, 2013 by Alan L Sklover

Key Words

What is the meaning of: “CLAWBACK”?

In the employment context, “clawback” means exactly what it sounds like: “an employer taking back from the employee monies, benefits, stock or other things of value in the event certain conditions or circumstances take place.” 

“Clawback” provisions are found in many bonus plans, stock plans, benefit plans and severance plans. Recently some laws have required “clawbacks.”    

A common example of a “clawback” would be the following provision in a bonus plan: 

“If an employee receives a bonus, and within two years it is determined that he or she engaged in financial wrongdoing of any kind, while employed by the company, the employer has the right to ‘claw back’ from the employee the entire bonus paid, without any credit to the employee for taxes paid on the bonus.”

A second example of a “clawback” would be a law that provided, “A senior executive of a public company who has engaged in behavior that resulted in a restatement of earnings shall have his or her entire bonus and stock awards for five previous years clawed back in their entirety.”

A “clawback” refers to a return of monies or benefits already paid or delivered, while a “forfeiture” refers to a loss of the right to later receive the monies or benefits.                                                              

P.S.: If you would like to speak with Al Sklover directly about this or other subjects, I am available for 30-minute, 60-minute, or 120-minute telephone consultations. Just [click here.]

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

“When laid off, can I get my unvested options vested?”

Published on January 5th, 2013 by Alan Sklover

Question: Hi, Alan. I am currently employed by a large tech company and I have received equity compensation throughout my tenure. Some of this equity has yet to vest.

I have recently been informed that my position is being eliminated and I have been encouraged to find a new position, either in or out of the company. I have identified a position in a different industry and, if I do not find another position in my company, I will likely take the position in the new company.

Should I approach my current employer and try to get my unvested options vested? Can you suggest a strategy to do this? Thanks.

Lori
Merrick, New York

 Answer: Dear Lori: Sorry to hear of your impending job elimination. Your positive attitude is good to see, and will surely help in your upcoming transition, whatever it may entail. I’m glad you’ve written in. Here are my best thoughts:

1. First, are you certain that you will lose your unvested options if you depart the company? I say this because I have found that many of my clients have wrongly presumed that unvested options are simply lost upon termination of employment. Whether or not you lose your unvested options at this time should be clearly set forth in your employer’s Stock Option Plan. Request a copy of that Plan from your Human Resources representative, and read it over carefully. Be aware that many companies change their Stock Option Plans periodically, and so you may have more than one Stock Option Plan applicable to your options that might require review.

2. My experience is that a great many “equity” plans provide for continued vesting so long as the employee is terminated without cause, and the employee does not compete directly or share confidential information. By “equity” I refer to stock, stock options and other securities of a company. Over the decades I have reviewed many, many employee participation equity plans, and have found many of them to provide for continued vesting of stock options where (a) the employee is terminated without cause, (b) the former employee does not go to work for a direct competitor, and (c) the former employee does not engage in any other misconduct, such as sharing or using the former employer’s confidential information. Some Plans, but only a few, provide for “accelerated” vesting in the event of a termination without cause. (By “accelerated” I mean all vesting takes place now, at one time, and not over an extended period of time.) Look for these things, especially, when you review your stock option plan(s).

While most stock option plans contain an awful lot of legal “mumbo-jumbo” language, I think you can probably review your employer’s Stock Option Plan by yourself looking for what happens upon a termination without cause, without having to pay an attorney to do so for you.

3. It is also likely that your employer has a Severance Plan – most large employers do – which might, on its own, provide for continued or accelerated vesting of your unvested stock options. At large employers, it is most common – indeed, almost universal – to provide some kind of severance to employees who are laid off, restructured or downsized due to no fault of their own. A severance agreement provides for (a) the employer to get certain advantages it seeks but does not legally deserve, including the employer’s waiver of claims, and an agreement to keep confidential matters secret, and for (b) the employee to get certain payments and/or benefits, as well, including continued salary and continued health insurance. You may find that your employer’s Severance Plan provides for continued or accelerated vesting of your stock options if you read the Severance Plan, or what is commonly called the Summary Plan Description, or “SPD” for short.

While most severance plans also contain an awful lot of legal “mumbo-jumbo” language, I think you can probably review your employer’s Severance Plan by yourself looking for what happens to your unvested options upon a termination without cause, without having to pay an attorney to do so for you.

4. If your Stock Option Plan provides for loss of unvested stock options upon termination, and your Severance Plan does not say differently, then you have nothing to lose, and everything to gain, by requesting vesting – either over time or accelerated now – of your unvested stock options. I believe strongly that a departing employee – and especially a departing employee who has been terminated without cause – is unwise, perhaps even foolish, not to request that unvested equity – whether stock, stock options, or other forms of equity – be vested immediately or over time. As I often say to clients who are reluctant to ask for vesting, “If you don’t want to request the vesting of those stock options, then simply have your employer send them to me.”

And as I also often say, “There is generally no downside to any request that incorporate the “Three Magic R’s,” that is, (a) is presented with Respectful, (b) is Reasonable in amount or degree of request, and (c) is accompanied by a solid and convincing Rationale.” So long as these three R’s are incorporated into your request, then I would not expect any kind of downside to making the request.

5. The best “Rationale” to accompany your request for vesting of unvested stock options upon termination without cause is that loss of what you earned in the past is simply “Punishment for No Crime.” By “punishment for no crime” I mean that you are having something taken away from you, that you earned, without any good reason. It seems so odd, and out of place, to hurt a departing employee in the “pocketbook” when he or she least deserves it and most needs it. Such a request can be made either before termination takes place, or during the process of your severance negotiations. It should not be directed to anyone in Human Resources, but instead to a senior executive who knows you, who can intervene on your behalf, if he or she is motivated by your request to do so.

6. If you have any valid and credible “claim” against your employer – just as examples, that you were chosen for position elimination because of your age, gender or race – then when you raise that in severance negotiation this is the “remedy” you might consider requesting as a resolution. In the previous section, above, I mentioned the “Punishment for No Crime” rationale, which is really an appeal for “fairness,” as well as a mention of “need.” While they are both good “rationales” for any request, a stronger rationale is “I have a legal claim; can we resolve by vesting, instead of heading to Court?” Is this threatening a lawsuit? Some would say so. I would not say so: I would say it is simply resolving all matters, including waiving claims, when ending a relationship, which is precisely what is supposed to happen in the severance process.

By the way, other “claims” you might raise at this time could be for non-payment of this past year’s bonus (either full year or partial year), or unfulfilled past promises to you or either raises or promotions, or both.

For more information about severance negotiating at time of termination, see our Blogsite Resource Center Section on Severance Negotiating.

Remember, though, that if you resign to take a different job for another employer before you are officially terminated then you will not be entitled to any severance whatsoever.

7. In case you hear “We can’t do that; the Plan does not allow it,” don’t forget the “Doctrine of Financial Equivalents.” “What the heck is that?” you might be asking. It is simply this: while the employer may be prevented from vesting your unvested stock options (at this time or in the future) by the terms of its Stock Option Plan, nothing in the world prevents your employer from paying you a sum of money that approximates the value of what you are now losing. That is, the “financial equivalent” of the lost “equity.” There is no rule against that, and is a rationale that often overcomes the “we cant do that” defense when raised by Human Resources representatives.

8. With these things in mind, I hope you will seriously consider making a request for your unvested options to be vested (immediately or over time), or that you be paid for the value of what you are losing. It’s hard enough to make a living, and even more difficult to attain a position and do good work such that you are awarded stock options. It would be a shame to now lose what you worked so hard to attain. This is the time to make this request, not years later when you will probably wish you did. I don’t really have a “vote” in this, but if I did I’d surely say “Go for it.”

If you would like to obtain a model letter to assist you in making a request that your unvested options be vested, simply [click here].

Lori, thanks for writing in. Good luck in relocating yourself in a position that provides support for you and your family, as well as purpose and meaning in your life. Have faith that you will, and, I am certain, that you will.

My best to you,
Al Sklover

P.S.: One of our most popular “Ideal Packages” of forms, letters and checklists is entitled “Ultimate Severance Package” consisting of four Model Letters/Memos for severance negotiation, as well as our 94-Point Severance Negotiation Checklist.” To obtain a complete set, just [ click here. ]

© 2012 Alan L. Sklover, All Rights Reserved.

Robbery by Repurchase Rights – A Private Equity Story

Published on November 29th, 2011 by Alan L Sklover

“Once you give up integrity, the rest is a piece of cake.” 

– J.R. Ewing, From the TV Series Dallas

ACTUAL CASE HISTORY*: Kurt was intrigued. As a well-known and highly regarded Marketing Consultant to large automotive dealerships, he was presented with what seemed like a grand opportunity: to help build a national network of motorcycle dealerships, with the goal of “taking it public” in five years or so in an Initial Public Offering (“IPO.”) The best part of the opportunity was his becoming an owner of 5% of the company, a potential reward of extraordinary value – perhaps in the many millions of dollars – if things went according to plan.

To come on board, Kurt would have to leave a secure and long-term position with his firm. And, too, to come on board Kurt would have to take a significant cut in income for three or four years. But other things were quite enticing. First, the people putting the deal together were part of a highly experienced and highly regarded Private Equity firm with a proven track record in automotive private equity businesses. Second, the team being put together to run the new company was top-notch, each in his or her own way an expert in one aspect or another of the automotive business. Third, the potential rewards were “in the $5 million to $10 million” range, which would quite literally set Kurt up for life.

The pitch was simple: “Come on board, take a significant pay cut, build a business that is highly profitable, and when we sell it we will all enjoy the sweet fruit of financial success.” Kurt bought in, with his mind, heart and soul. Kurt also invested $10,000 “as a sign of good faith” for the 10,000 shares of the company he was allotted.

And, so, for four years Kurt and his colleagues did everything humanly possible to build the business into a highly profitable machine. That included laying off most of the “old guard,” who were used to doing things “the old way.” That also included eliminating health care contributions, cutting paid vacations in half, and slashing everyone’s compensation. It was “the Private Equity way of doing business.” Prestigious institutional investors joined in to gain greater growth of their endowments, seemingly unaware of (or unconcerned about) the pain the process inflicted on good, hard-working people who saw their long-term efforts and loyalty dismissed, devalued, and dishonored.

Four years later, just six months or so before the company was to be sold to the public in an IPO, Kurt and his colleagues received something they did not understand: a “Notice of Exercise of Repurchase Rights.” Not being able to understand the opaque legal jargon in which it was written, Kurt consulted our firm. We reviewed the papers before us, and gave Kurt the bad news:  his share of the company – soon to be worth perhaps several million dollars – was being purchased back from him for the same $10,000 he had paid for it. The worst part was that Kurt had agreed to just that way back when he was hired.

You see, when Kurt was hired, he purchased his 10,000 shares for $10,000, he signed a 21-page “Executive Shares Agreement,” and on page 17 of that document was a section entitled “Repurchase Rights.” That section provided that, at the Company’s option, at any time, it could repurchase Kurt’s shares for the lesser of (a) the amount he had paid for the shares, and (b) the market value of those shares upon repurchase. Kurt had invested $10,000, and the shares were now worth about $7 million, so the Company had a right to buy them back for just $10,000. Each of Kurt’s colleagues received the same notification.  

Kurt did not understand what “Repurchase Rights” meant when he signed the Executive Shares Agreement, but he will never forget what that meant to him. When he and his colleagues went to the Private Equity owners of the company in dismay and anger, the response they received was icy cold: “Didn’t you have a lawyer read the agreement before you signed?”   

Not a good result for Kurt, or his colleagues. Four years of hard work, at low pay, without benefits, all for a dream that just disappeared. Sadly, in business and especially in the “Private Equity world,” it happens every day, without legal remedy or recourse.

LESSON TO LEARN: Over the years I have reviewed scores of agreements for employees going to work for Private Equity firms. Sometimes provisions regarding “equity” (stock, options, restricted shares, etc.) are found inside Employment Agreements. Sometimes they are in separate agreements called “Share Purchase Agreements” or “Executive Equity Agreements.” In perhaps 90% of these and similarly-entitled agreements I have found “Repurchase Rights” which give the company the right to take back the “grand opportunity” that attracted the employees to come on board in the first place.

Though I have come to expect to find repurchase rights in such agreements, I have never heard a good reason for their being there. If the employee is being offered a “lifetime opportunity,” why in the world should the company have the right to take that “lifetime opportunity” away, especially after the employee has worked for years to earn it? My own view is that repurchase rights are nothing less than a legal way to rob people of what they’ve earned by outwitting the employees by having them sign the “share grant” (or similarly named) agreement containing “repurchase rights.”    

If you are considering working for a company owned (or to be owned) by a Private Equity firm, look carefully for “Repurchase Rights,” a “Repurchase Option,” or words to that effect, and do what you can to get them removed or changed. No matter what the paragraph or section is labeled, if the effect of the words is that you can be forced to sell your equity at a price determined by others, tread most carefully.

Some “Repurchase Rights” provide that the repurchase price payable to the employee is zero. Some provide for a repurchase price of “the lower of the original purchase price or the then-current market value of the shares.” These provisions simply repay the employee for what he or she originally invested, while taking away the now-more-valuable shares. Some provide for a repurchase price at their fair market value as determined – and here’s the trick – “in the sole discretion of the Board of Directors.” No matter what the precise words are, if by the “Repurchase Rights” you may be denied the benefit of your “grand opportunity,” you would be wise to do all you can to stop that from happening.

Every person faced with “Repurchase Rights” should resist them. If you are important enough to your prospective employer, the company will remove the repurchase rights, or agree to other measures to reduce the loss to you. If your prospective employer will not do so, you will be faced with a difficult decision: to take the risk or not to do so.

In business, it is important that you (a) identify risks, (b) assess those risks, and (c) reduce or eliminate those risk. When it comes to repurchase rights, there are steps you can take to do just that, if you are willing to devote the effort to do so.

WHAT YOU CAN DO: Consider taking one or more of these thirteen steps – and any others that may suit your particular facts and circumstances – to address the considerable risk inherent in “Repurchase Rights” in your Private Equity “grand opportunity”:     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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