Mailly Law - April 2020

April 2020

714-384-6531 | www.maillylaw.com

How Strong Is Your Retention Agreement? 3 Road Markers You Must Know

given a noncompete, you’re restricted from competing for business with the company you left for a certain amount of time. company stock options. These incentivize the current CEO to stay on at the business and to do well.” “Often, when we hear that a CEO is making hundreds of millions of dollars, that money is earned through

Retention agreements are a fantastic thing for clients who are ready for the next chapter of their lives, especially for executives taking a step back from the daily operations of the company. They are also used for executives who are continuing with the company after a merger. However, if you don’t have the basics outlined correctly, it’s detrimental to the well-being of not only yourself but also the company you’ve put so much time into. To ensure you know exactly how to proceed with your agreement, I have outlined the fundamentals of a retention contract below.

that’s granted to employees when they reach designated milestones. These milestones vary, but for a CEO with a retention agreement, their continued employment for a specified period of time is a commonly used metric. Often, when we hear that a CEO is making hundreds of millions of dollars, that money is earned through company stock options. These incentivize the current CEO to stay on at the business and to do well. Because the value of the stock is intrinsically tied to the company’s success, the better the CEO performs, the higher the stock price and the better the financial reward to the CEO.

SALARY AND EQUITY

NONCOMPETE PROVISIONS

SEVERANCE PROVISIONS

The salary or offer you will receive should be inviting. It should be similar to what other CEOs or executives in your industry are making, and it should be some combination of cash and equity. Most commonly, in executive retention agreements or other executive employment agreements, equity comes in the form of restricted stock. For those unfamiliar, restricted stock is compensation

In some employment contracts, an employee agrees to not enter into business with a direct competitor after the general employment agreement ends. These are known as noncompete provisions, also called “restrictive covenants.” I don’t usually recommend these to my clients, and they usually are not enforceable in California. In other states, though, if you’re

These are often called “golden parachutes,” and for good reason, given that they usually accompany the dismissal of a CEO after a merger. This is not uncommon, and there are many reasons a company might decide to dismiss a CEO after a buyout. Sometimes, the relationship turns sour, and other times, the board wants to move on. I’ve seen situations where the board of the buying company retains the CEO of the company being bought as CEO of the merged companies. Then, the CEO of the buying company uses the severance package to exit the company. Whatever the case may be, the board should try to maintain a good relationship with the previous CEO if possible. If you’ve been offered a retention agreement without one of these factors, reach out as soon as possible. We will work with you to ensure the offer is fair and appealing to all parties involved.

-Guy Mailly

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