Equity Deferred Comp: 10 Ways to Protect Yours

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“The more informed we are, the more we understand, and the better we are able to protect ourselves, our family, and our assets.”
– Spencer Sean

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Actual Client Experiences: Equity Deferred Compensation – reward for efforts and loyalty, in the form of ownership interests in your employer – has become a somewhat commonplace feature of employee compensation. Most often it is in form of stock, stock options, restricted stock units, or variations of them, as well as partnership or LLC “units.”

Countless millions of employees have been handsomely rewarded, some beyond their dreams, by grants of “Equity Deferred Comp.” However, over the past few years, we’ve observed an increased number of employees deeply disappointed in the results of their Equity Deferred Compensation. The underlying reasons include (i) vesting not achieved, (ii) occurrence of a forfeiture event, (iii) failure to timely accept or exercise rights, (iv) substantial dilution, (v) introduction of new equity classes, and, of course, (vi) lack of the enterprise’s success.


  • Upon hiring, Linda received stock option grants from her publicly-traded employer, all to “cliff vest” (that is, all at one time) after five years. Unfortunately, she lost them all to forfeiture when she was laid off four years later.
  • Tomas accepted salary and bonus reductions in exchange for LLC Units in his start-up employer. His original holdings amounted to 3% of equity. Two ensuing financing rounds, and the hiring of additional senior team members, diluted his equity holdings down to 0.2%.
  • Though retirement-eligible, Kerry delayed her retirement for two years in hopes of accumulating additional equity wealth when her privately-owned employer’s merger discussions came to fruition. Upon merger Kerry’s “wealth accumulation” was negligible at best, while members of Senior Management each were reportedly awarded tens of millions of dollars in a newly created classes of equity.

Could their disappointments have been averted? There are no guarantees, but with (i) the right insights, (ii) the right requests, (iii) transmitted in the right way, (iv) at the right time, each could have enhanced rewards and avoided risks, and thus, averted disappointments.

Lessons to Learn: On a regular basis, we work with employees like Linda, Tomas and Kerry, who were lured to new employers, or enticed to remain with their existing employers, based largely on their employers’ promises – and their own hopes – of wealth accumulation by means of Equity Deferred Compensation.

The siren song is “Come, grow with us, and (i) over time, when either we (ii) sell the company, (iii) merge with another company, (iv) sell our stock to the public, (v) go to market with our new product, (vi) garner an influx of new investment capital, or (vii) grow by purchasing other companies, you will share substantially in our success.”

Quite often, it works just that way. More often than in past years, it has not. You might be able to make the difference in this respect, if you try. With some guidance and guts, many of our clients have done so.

What Can You Do to Protect Your Equity Deferred Comp? Here are 10 Ways:

1. When Offered or Awarded to You, Have Experienced Counsel review all Equity Deferred Comp Documents. Offers are most commonly presented as part of: (a) a job offer, (b) a retention agreement, (c) a promotion package, and (d) an annual comp package. In each, you have a fresh opportunity available to you. Whenever you are offered (or “awarded”) Equity Deferred Comp, you have your best – and sometimes your last – opportunity to successfully request modification in your favor.

We offer a Equity Document Review Service, which includes review, analysis and summary of concerns for (a) up to 10 pages for $400.00, (b) 11 to 25 pages for $500.00, and (c) 26 to 40 pages for $650.00. The service does not include our communicating or negotiating with your employer, which would require retention of our firm by signing a retention agreement and payment for services on an hourly basis. If interested, you can call our office at (212) 757-5000, M-F, 9:30 am to 4:30 pm.

2. Maintain a File on Your Home Computer of Any Written Assurances, Estimates, Opportunities, and Anticipated Future Growth touted to you as Probable future Value you can expect. We usually think of the word “marketing” to refer to potential customers and clients. Employees with unique skills, strong industry relations, and revenue-enhancing histories often fail to appreciate that they, too, are targets of “marketing” by recruiters, Human Resources Talent Acquisition specialists, and senior management, with assurances of Equity Deferred Compensation.

They frequently include rather rosy portraits of the future as an employee-owner, almost always strategically labelled “Non-Binding,” or “For Illustration Only.” Their purpose is to “grab and hold” onto the imagination of their recipients – Investors and Employees – and to encourage their entry into, and continue participation in, the endeavor. These are sometimes referred to as “The Shiney Objects” in marketing parlance.

Such assurances used to entice employees – to either join the team or stay a part of it, are a potent source of leverage in future negotiations with employers in a variety of circumstances, including in event of future dissatisfaction with salary raises and bonuses, even at time of severance.

3. In Both Equity Incentive Plans and Award Agreements, Watch for the Words “Discretion,” “Discretionary” or “Sole Discretion” of the Company. These words are used near-exclusively to provide Compensation Committees (composed primarily of Senior Management) the authority to make final determination on matters of substance that advance the employer’s interests. Thus, almost always they represent “risk” to employee equity-holders.

However, wherever such “discretion” exists, and good rationales exist that it should be used in the interests of the employee, it can be used quite successfully.

4. If your Employer is Privately-Held, or Private-Equity Held, You Can Expect that All Documents – and therefore all your rights and interests – will be expressly “Subject to” the provisions of the Underlying LLC or Partnership Agreement. It is within this context that a great deal of abuse is often found. Why? Because, (i) the employee (and her or his Legal Counsel) are denied the opportunity to review the LLC or Partnership Agreement; (ii) where amendments that are risk-laden to the employee will most often be found; and (iii) the Equity Incentive Plan and the Award Agreements are “subject to” these “unseeable” documents.

It is also here that (i) Special Bonuses to Board Members can be committed to and agreed upon, but not mentioned to employee-owners, (ii) new and dilutive classes of equity are introduced to the company’s equity tables, that serve to severely diminish employee-owners’ interests, (iii) new limitations on employee equity vesting, ownership, sale, transfer and the like are introduced, without any notice to employee-owners.

If any document is “governing,” such as LLC and Partnership documents are in this context, and you cannot review it, and it can be changed at any time without even notice (prior or subsequent), your rights, interests and assets are 100% vulnerable, and rest only on wishes, hopes and prayers.

5. Don’t Hesitate to Request Improvements and/or Clarifications of Grant Agreements, often called Grant Awards. Generally speaking, a “Plan” is a set of “rules” for how the company’s Equity Deferred Compensation will be administered, including grants, vesting and forfeitures. Do not expect that any changes will be made to a Plan solely on your behalf, unless your continued relation is critical to the employer’s continued business viability.

The Grant Agreement between employee and employer is the place where even small changes in text can yield large rewards for Award Recipients. 

Consider using our “Model Memo Requesting Vesting of Unvested Equity upon Termination Without Cause.” It shows you “What to Say, and How to Say It.™ Just [click here.] Delivered Instantly by Email to Your Printer.

6. Save Copies of Your Equity Deferred Comp Documents on Your Personal Computer, Not on Your Workplace Computer. Bear in mind that employees are always vulnerable to loss of connection to their employer’s computers upon unexpected termination. Protecting your equity deferred comp starts with saving copies of all equity award documents for future reference on your own computer. The same goes for notices of amendments to the Plan, which govern the applications and interpretations of Equity Plans and all other related documents (other than underlying Shareholder, LLC, or Partnership Agreements, as explained in Section 4, above.)

You begin to both empower yourself and protect your equity assets if you make it a habit to save these on your home computer. It is tragically common how often clients have no access to these materials exactly when they need that access the most.

7. Note on Your Personal Calendar all Equity Vesting, Exercise, and Notice Dates. Chances are that you regularly place many of your important personal dates onto your personal calendar, including birthdays, anniversaries, dates of upcoming weddings, vacations, and the like . . . dates you would not dare miss.

We strongly suggest you enter your vesting, exercise and notice dates on your personal computer calendar, as well. Failing to do so could result in your missing critical “control dates,” essential to the assets you may need to purchase those birthday presents, pay for those upcoming weddings, and afford those planned exotic vacations.

8. Please NEVER – no matter what – Resign without First Being Reasonably Certain of How Doing So May Affect Your Workplace Equity Holdings. First, being a former employee, and not a present employee, often negates any outstanding opportunities for vesting and the like.

Second, Award Agreements and Equity Incentive Plans often provide that “voluntary” resignations diminish or negate equity interests, and in many situations the voluntariness of your quitting is arguable, at the very least. 

For a modest fee, we offer our “Model Involuntary Resignation.” It shows you “What to Say, and How to Say It.™ Just [click here.] Delivered Instantly By Email to Your Printer.

Third, if part of your reason for resigning is to avoid your own participation in improper employer behavior, or due to a danger to your wellbeing at work, you have significant leverage in discussions of how your equity rights and holdings should be treated, given the “discretion” of the Compensation Committee and Senior Management. (See Section 3, above.)

Without question, if you have copies of your documents, know you relevant dates, and understand what you would like, need or deserve, you’re in a preferable position in any discussions regarding how your equity should be treated.

9. Leaves of Absence can Sometimes be Used to Extend “Employed” Status in order to Reach Critical Dates. More times than I can count I have seen lawyers assist employees in extending their status as “employed” in order to reach vesting, satisfy the requirement of “remains employed,” and other critical dates and deadlines. As examples, I’ve seen the leaves of absence based on (i) the federal Family Medical Leave Act, (ii) short-term disability status, and (iii) Paid Parental Leave, used to do so.

10. Experienced Counsel. Perhaps the most basic insight into the negotiation of workplace equity is this:

“What you accomplish in negotiation is not determined by what you say at the negotiation table, but rather by (i) how you approach that table, (ii) what you bring to it, and (iii) how deftly you ‘play your cards.’” And perhaps nowhere is that insight more relevant and valuable than it is in Equity Deferred Compensation matters.

Counsel experienced in these matters likely have acute vision, a deft hand and a light touch in making such requests. Is it wise to have a heart surgeon perform heart surgery, or would you rather have a dermatologist do so for you? Experienced Counsel know the trap doors, the confusing conditions, the usual limitations, the disguised definitions, and the difference between (i) a likely path to delight and (ii) a probable path to disappointment.

In Summary . . .

Have you ever known a person who is very successful financially, who has neither inherited it nor owned her or his own company? Chances are they have reached their financial status by grants of Equity Deferred Compensation from one or more of their employers. The opportunities are there, but ofttimes the understanding, information and insight into the process is not. The challenge is to become educated about the subject, and then act with prudence and preparedness. Avoid disappointment. Trust, but Verify. Look before you leap. Nothing is guaranteed, other than that “Good Habits create the Paths to Good Outcomes.”

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