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

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

“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:

1(a). First, before the “Hurricane” hits, get a “Solid Footing” by Maximizing Your “Positional Leverage.” “Positional Leverage” is the term I use for negotiating leverage you enjoy simply as a function of your position.

Example 1: You are always more confident when you have more than one option to choose from; it makes losing one of them less fearful, and less painful. So, put your feelers out to recruiters and potential alternative employers as soon as you can. Maximize your “positional leverage.”

Example 2: It is common that, just before the employer makes a formal announcement that Private Equity investors will be coming into, or buying, the company, they request that the most valuable employees sign a non-compete agreement (if one exists, then a stronger one, at the request of the buyers.) Always, always, always resist and delay your signing one, as that would decrease your options to become employed by a competitor if you wanted to. Discourage any efforts to minimize your “positional leverage.”

Example 3: If you have sole knowledge of, say, the cloud computing operations, look warily on any new consultant or colleague who is assigned to your “domain.” Protect your territory; be less than generous with giving away your specialty.

It’s sort of like stocking up on groceries and boarding up windows before a “hurricane” arrives: you’ll be far better able to withstand the winds and loss of utilities if you have prepared yourself.

We offer a 152-Point Master Checklist of Employment Negotiation Items to help you “remember everything and not forget anything else.” To obtain a copy, just [click here.] Delivered by Email – Instantly!

1(b). By the way, there is very significant additional “positional leverage” in working together with your colleagues. Let’s suppose you have worked for six years for a family-owned company. The owners have been approached by Private Equity investors, and they want to sell the company to them. There are seven senior managers whose continued efforts seem to be crucial to the deal.

If four of the seven decide to work together for their mutual benefit, such as (1) none of us wants to sign a non-compete, (2) all of us wants severance if we are let go, (3) none of us wants to lose our free health care coverage, and (4) all of us want our stock to vest “if we are let go before it vests,” well, you all have a much better chance of achieving each of those things. And, too, the cost of one attorney is an attractive thing, too.

Is it easy to form a team? No, but once the potential benefits of doing so are shared and understood, it becomes a whole lot easier. The added leverage – over the current owner and the Private Equity investors, too – is very significant, as a good part of what they are seeking to “buy” is the management team, and especially its most valuable members.

2. Second, Prepare Your Own “Umbrella Memo,” and the Sooner the Better: Don’t wait to see what might be offered to you; when it is given to you, it will likely be not very understandable, not what you want, and too late to meaningfully negotiate.

Instead, be proactive, not reactive: take the initiative to consider what you seek, and be prepared to present that to your negotiating counterpart with clarity and precision. Doing so will add to your leverage in the negotiation process by a hefty degree. In effect, it is proactively negotiating the terms of your deal even before you have been given your offer.

If you know what you seek, you can share that with your employer (and the Private Equity owners or investors). To the extent possible, let them respond to you, not the other way around. Additionally, in doing so, you are preparing yourself to objectively assess – for yourself – the offer that might be made to you. Simply put, when you and your negotiating counterpart know what you want and need, it just increases your chances of getting exactly that.

3. Three of the Four Critical Elements of Your “Umbrella Memo” are the “3 R’s” of employment negotiation: (a) Rewards, (b) Risk Limiters, and (c) Role. Many years ago, I noticed that employment offers and agreements are best analyzed by use of what I call the “Three R’s of Employment Agreements”: the (a) “Rewards” you want and need, (b) what “Risk Limiters” you want and need; and (c) what “Role” you want or seek. The basics of what you seek will invariably be composed of the “3 R’s,” as follows:

i. Rewards:

    • What is a “reward?” Anything of substantial value that you want, need or feel you deserve. For you, working from home may be more valuable than your salary; everyone is different. As purely hypothetical examples, these are illustrative

rewards:

    • (i) salary no less than $150,000, (ii) bonus potential of no less than $25,000, (iii) benefits no less favorable than those you have now and those of your colleagues, and (iv) as to company stock ownership, no less than 1% of the company vesting over three years.

ii. Risk Limiters: What is a “risk limiter?” Simply put, a reduction of risk of loss of a reward. You can identify “risk limiters” by simply placing the words ‘no loss of’” in front of each of your desired Rewards. Loss of . . . the job, the salary, the bonus, the benefits, the stock, etc.

As purely hypothetical examples, these are illustrative risk limiters: (i) a fixed-term of employment (to avoid “prevent loss of job”), (ii) some severance in the event of termination without “cause,” (to prevent “loss of income,”) and (iii) vesting of all equity granted upon termination or expiration, or non-extension of term after it expires (to prevent “loss of promised equity.”) These are just a few examples.

iii. Role:

    Years ago, most employers offered “job descriptions” that set out with clarity the basic duties and responsibilities of the job; that is unusual these days. That is in large part due to employers’ desire to avoid commitment on that point. Some skeptics might say that is so that employers can add many additional duties to an employee’s job without having to pay that employee more. Other skeptics might also say that “The best way to get someone to quit is to add to their assignments menial, subservient, low-status, boring duties.

To the extent you can, it is wise to try to get a commitment from your employer on the basic elements of your role. To do so, we suggest that the three most important “sub-categories” of “Roles” for you to try to tie down in your Umbrella Memo are: (i) Reporting (to whom you report), (ii) Resources (you will always have to fulfill your duties), and (iii) Responsibilities (including your authorities, such as hire and fire.)

4. The Fourth Critical Element of Your “Umbrella Memo is: “Regardless . . . “ As noted above, “Hurricane Tactics” are intended to make your employment agreement essentially without “commitment” on the employer’s part in good part by your agreement being made expressly “subject to” (which in legalese means “subservient to”) other agreements that either you cannot understand, have not been provided, or are modifiable at a later date without your consent or knowledge.

Thus, the Fourth “Umbrella Memo” Element is represented by the word Regardless . . .”, that is, “Regardless of (a) any other document, including any comp or benefit Plan, (b) any other event or circumstance, or (c) any other owner taking over, these agreed items will not be lost or changed without my signing another agreement,” or similar words to that effect.

5. Use the Simplicity of a Term Sheet for Your “Umbrella Memo.” To best overcome the five Hurricane Tactics that are likely to confront you when negotiating with Private Equity owners or investors, you should proactively prepare and submit a term sheet of your “Three R’s.” A “Term Sheet” is simply a list of items that you wish to have in your relation, that is, the Rewards, the Risk Limiters and the Role that you would find minimally acceptable, and most importantly, the Regardless language, as well.

Here is an illustrative – but not exhaustive – list:

Regardless of: . . . any other document, agreement, event, or circumstance, and whoever may own the company, these points are binding on the employer and will remain in effect:

 

Rewards: Salary: $75,000.
Bonus: Target: 20% of Salary
Benefits: Health, Disability, Life Insurance, premiums fully paid; 401k
Vacation: 3 Weeks per Year
Equity Grants: Same as Executive Team

 

Risk Limiters: Contract: Term of Three Years (= No loss of Job)
Severance: 6 months Salary & Benefits if not renewed (= No loss of Salary)
12 months of Salary if terminated without cause (= No Salary loss)
Bonus: Prorated if I Leave (= No Loss of Bonus)
Benefits: Continued for six months if Terminated (= No Benefits loss)
Vacation: Can Be Carried Over; Paid Out if I Leave ( = No loss of vacation)
Equity Vested: if I Leave for Any Reason but Misconduct ( = No loss of stock)
Non-Compete: Void If Employer does not Honor Obligations above

 

Role: Report Directly to the CEO
Resources include Three Associates and two Clerical Staff
Role as Chief Liaison between Business Development and Sales Functions

 

Asked to sign a non-compete agreement? How can you respond? How should you respond? Our “Model Letter: Response to Request You Sign a Non-Compete” shows you “What to Say, and How to Say It.™ To obtain your copy, just [click here.] Delivered by Email – Instantly!

6. Negotiations, if any, Will Likely Take Place with Your Present Employer(s). Bear in mind that you will be asked to sign new agreements by your present employer, and discussions of those new agreements will be with your present employer, as well. Each of those documents is in all probability going to be conditional on the documents being signed and going to say “If the deal goes through . . .” All such agreements must be signed in order for the deal to go through.

Please also bear in mind that he or she has an awful lot riding on this investment taking place, perhaps millions of dollars, so he or she will likely urge you very strongly to sign the agreements “as is.” It is to be expected. That said, there is always negotiating room in any deal. While the eventual payout to the present owners may have to be a touch smaller than they would like it to be, your being treated fairly and achieving some dignity and security in your position is your goal, and can always be accomplished where there are millions of dollars being offered and sought, as there probably is here.

7. Even if you achieve Just One Important Goal, “Umbrella Negotiating” is worth it. You should probably not think that you will get everything your heart desires into an employment agreement in this context, or in any other agreement you will be asked to sign. It just doesn’t work that way, but if you get one, two or three major points in your favor into your agreement – as examples, (1) no non-compete, no matter what, (2) vesting of any shares no matter what, and (3) severance of at least six months salary and benefits if the company relocates, it is surely worth it. Each of these goals could be the one thing that makes you the most happiest in the future, which is, in the long view, what negotiating at work is all about.

In Summary . . .

Private Equity Investors becoming owners of your employer, whether partial or in full? Be prepared for their documents or their representatives to make you unnecessarily confused, bewildered, overwhelmed, manipulated and rushed into signing documents you have had little or no opportunity to understand and negotiate. “Umbrella Negotiating” – intentionally maximizing your leverage and focus, is the best way to address the “Private Equity” challenge you will surely face. Trust me: I’ve been “there” so many times, with so many clients.

P.S.: If you would like to speak directly about this or other subjects, Mr. Sklover is available for 30-MINUTE, 60-MINUTE, OR 120-MINUTE TELEPHONE CONSULTATIONS, just [click here.] Evenings and weekends can often be accommodated.

SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you – traps and pitfalls, included – and to avoid the likely bumps in the road. For those offered a job by a Private Equity Employer, or in connection with a likely Private Equity investment, consider “Umbrella Negotiating” to deal with the very likely “Hurricane Tactics.” It’s a matter of wise “navigation and negotiation.”

Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.

*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.

Please Note: This Email Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale.

Sklover Working Wisdom™ is a trademarked newsletter publication of Alan L. Sklover, of Sklover & Company, LLC, a law firm dedicated to the counsel and representation of employees in matters of their employment, compensation and severance. Nothing expressed in this material constitutes legal advice. Please note that Mr. Sklover is admitted to practice in the state of New York, only. When assisting clients in other jurisdictions, he retains the assistance of local counsel and/or obtains permission of local Courts to appear. Copying, use and/or reproduction of this material in any form or media without prior written permission is strictly prohibited. All rights reserved. For further information, contact Sklover & Company, LLC, 45 Rockefeller Plaza, Suite 2000, New York, New York 10111 (212) 757-5000.

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