Even with a “rock-solid” Employment Contract “You can’t get blood from a stone.”
ACTUAL CASE HISTORY: Ellis was thrilled. After eight years in the magazine industry, at 31 he’d just achieved a real dream. With hard work and great creativity, Ellis’s reputation as a “man on the move” got him named Editor of a new men’s magazine backed by a major media conglomerate. Ellis was proud, at having successfully negotiated a hefty compensation package with a first-rate salary and guaranteed annual bonus for the first two years. And in case anything went wrong, he was also entitled to a one-year severance package of full compensation and benefits.
Perhaps most exciting of all, the media conglomerate had established a new company to own the magazine, and gave Ellis 5% ownership. The new company was a “limited liability company,” often referred to as an “LLC.” If things went well, that ownership interest could grow over time to 10%. To ensure the contract was rock-solid and without loopholes, Ellis hired a seasoned employment attorney who reviewed the contract and found it “as good as they come.”
Eight months later, things fell apart. Poor promotion resulted in poor subscription and newsstand sales which, in turn, resulted in poor advertising results. This was followed shortly by cutbacks in overhead, including payroll. Soon critical staff began to jump ship. Two months later, the entire venture collapsed, with liabilities far exceeding assets. Ellis didn’t receive the salary he was due, his guaranteed bonus, or his severance. His 10% ownership interest was worthless. His lawyer told him there was nothing he could do.
Ellis consulted us for a second opinion. We agreed with Ellis’s attorney, and disagreed with her, too. Yes, there was little chance Ellis could collect what he was due. But there were things that Ellis could have done, way back when he was negotiating the terms of his employment with the media conglomerate. Unfortunately, neither Ellis nor his attorney had thought of doing those things.
LESSON TO LEARN: Those who work for limited liability companies, commonly called “LLC’s,” and those who work for corporations (we call them “INC’s”) have one additional, significant risk to address in employment negotiations: What happens if the employer’s assets run out before you’re paid what you’re owed?
A central theme of SkloverWorkingWisdom™ is that, in addition to the “rewards” of a job, it is important to negotiate – and limit – the “risks” inherent in that job, too. What are the “risks” of a job? They are found by placing the words “loss of” in front of each of the “rewards.” No matter how “rock-solid” or “air-tight” an employment contract may be, it is not “solid” or “tight” at all if it does not address the possibility that the company might run out of money to pay you.
The law in almost every state and country provides entrepreneurs and investors with the privilege of establishing businesses with “limited liability.” This means that the most the entrepreneur can lose if the business fails is the investment already made; creditors cannot look to the investors’ other assets to satisfy debts of the limited liability entity. This encourages investors to take risks, because it limits those risks to the amount invested. No one can take away the home or savings of investors in limited liability entities. You face this whenever you do business with a corporation, a limited liability company, or a limited partnership. The “tail-endings” on the names of these entities – corp., inc., llc, llp – are all “red flags” to everyone who does business with these entities that they enjoy limited liability.
If you do business with a very large limited liability entity, or one with very significant assets, such as Time, Inc., or the Xerox Corporation, or Bloomberg, LP, as three examples, you have less to worry about, because it is highly unlikely such large companies will become insolvent, or file for bankruptcy (although a few do). But if you do business with a newly-formed limited liability entity, or one you know to have limited cash on hand, you are on special notice that your risk in dealing with them is acute: although you may have a contract that says that the corporation owes you money, there’s no guarantee that there will be assets to satisfy those obligations to you, or recourse elsewhere.
Be careful in this regard: large companies often set up a limited liability company for new or special projects just to limit their risk in the venture. So, for example, if you’re going to be employed by the Microsoft Corporation, you have little to worry about in this regard; however, if Microsoft is offering you a job, but asks you to work for a new, limited liability company or a separate corporation it has just formed with limited assets, you are clearly at risk. Is there anything you can do? Sure, but you can’t wait until the problem arises. The remedy available to you is a kind of preventive medicine, to be applied during the negotiation phase.
The lesson is this: when considering working for a limited liability entity – what we call an ‘L-L-C or an I-N-C’ — make sure you take steps to address the risk that that there will be no money left to pay you. In negotiations, insist on one or more of the preventive measures noted below, or another one you may craft, that will help you limit this risk. Our QVP™ Method refers to these as “risk limiters.” If you don’t ask for them, it’s near certain they won’t be offered to you. And your leverage is greatest when you’re being hired. Only you can free yourself of this particular risk; no employer will simply offer it to you.
WHAT YOU CAN DO: If you’re faced with the special risk of working for a limited liability entity, what we call an “L-L-C or I-N-C,” consider asking for one of these provisions in your employment agreement. We’ve successfully requested each one for our clients; you can too.
A. A Guarantee by a Parent Corporation with greater assets. As an example, if you’re going to be employed by an L-L-C or an I-N-C owned by parent corporation Sony Corporation, ask Sony Corporation to provide their own written guarantee of the L-L-C or I-N-C’s obligations to you.
B. A Guarantee by an Affiliated Corporation or Large Shareholder with greater assets. Even if ExxonMobil is simply an investor in your new limited liability employer, if ExxonMobil views your value as significant, it may be willing to shoulder the obligation of providing you a guarantee.
C. A Personal Guarantee by an Individual. A large investor, or a CEO whose reputation is dependent on success in the venture, may be willing to provide you a personal guarantee of the employer’s obligations.
D. Placing an Agreed Amount of Money Into an Escrow Account: One client of ours was going to work for a new publishing venture that was being initially funded with $5 million by investors. We asked for – and were granted – $100,000 to be placed into an escrow account that was to be paid to the client – as a kind of severance – if the new company didn’t pay her for any reason, or filed for bankruptcy.
E. Payment of a Sign-On Bonus. Though seemingly unrelated to securing the fulfillment of promises, the payment of a sign-on bonus can be a kind of “insurance premium” paid by the employer for the assumption of risk by the employee.
F. Making a Forgivable Loan. In certain circumstances, such as where relocation is necessary for the new employee, or where the new employee must buy a car for business purposes, we have used a “forgivable” loan to secure the obligations of a limited liability employer. In these instances, a loan is given to the employee upon commencement of employment, to be repaid over time, but to be forgiven if the employer fails for any reason to fulfill its contractual obligations to the employee.
Three caveats are in order: first, it’s always important that any promises or guarantees be in writing, spelled out clearly, and signed by an authorized company official. Second, don’t be surprised if your employer expresses initial reluctance to any of these suggestions; each is acceptance of risk that they’ve already shown an unwillingness to assume. You may need to be persistent. Third, we always suggest you have legal counsel review the wording of every important document you’re a party to.
Always be proactive. Always be creative. Always be persistent. And always do what you can do to protect yourself and your family. Take steps to secure employment “reward” and reduce employment “risk.” That’s what SkloverWorkingWisdom™ is all about.
To Better Protect Yourself: While you should always consider using an experienced attorney who is both knowledgeable in this area of law, and licensed to practice law in your locale, to guide you and assist you, there is a lot you can do to help yourself, too. It might be best to come to your attorney with ideas and draft in mind, and seek his or her help in final revisions. Regardless of how you choose to proceed, remember that “forewarned is forearmed.”
We offer for your immediate purchase by download from our website our “Model Letter Requesting Employment Guarantees,” including a sample memo and the precise provisions you might ask for, and their wordings. To obtain a copy, simply [click here].
If you’d like to learn more about the general topic of Negotiating For Yourself at Work™ consider reviewing our SkloverWorkingWisdom™ Resource Center by [clicking here]. There’s nothing out there like our unique 7-Step Negotiating Method. And if you are in need of legal counsel, our Legal Website www.ExecutiveLaw.com may be of help as well.