by lawyer Gary A. Paranzino
Updated May 2022
As a longtime lawyer in the technology industry I am often hired to advise executives behind the scenes regarding their job offers.
An executive job candidate should consider the process as three separate stages: Stage 1) interviewing and becoming the top candidate, Stage 2) obtaining an informal offer, and Stage 3) reviewing and negotiating the Offer Letter.
Stage 1 -- Interviewing
It can be helpful to receive advice during this early stage, especially with regard to how to answer inquiries from the recruiter or hiring manager about your current compensation package.
Information you provide at this stage can be used to try and lock you into lower compensation than you would otherwise be able to negotiate. This includes information about the equity you might be giving up at your current employer that the new employer would need to compensate you for.
As a candidate is is tempting to convey your current compensation as a floor. But the benefits of doing this are overrated.
The potential employer or its recruiter has already targeted you as a valuable candidate. They may admire you and your current employer. The closer they can get to hiring you for your current compensation, the bigger the win for them.
Disclosing too much in Stage 1 may have more downside for a candidate than the downside of playing coy (which in theory could turn off a small number of employers who like to always be in control of negotiations).
If an employer is worried that they can't afford you, they probably can't. Remember, they already targeted you because they know you have the proven skills they need.
The goal in Stage 1 is to be attractive to them without the attraction being based on your being the cheapest option.
I spend a lot of time working with executives who call me after Stage 1, where they have already provided substantial information. It is not usually fatal and the impacts can be reversed with good strategy and execution in Stage 2 and Stage 3.
Stage 2 -- Informal Offer
In an increasing trend, accelerated in the Covid-era, prospective employers have placed more emphasis on providing informal offer terms in conversation or via emailed or even texted bullets points.
There are several reasons for this, and they are important to understand because it affects how one should negotiate.
The first reason is attempted lock-in. A candidate is at a tremendous social disadvantage before a written offer is made.
Until a candidate knows they have an offer, they are on "best behavior" and hobbled in acting in their best interests as an arm's-length negotiator. Companies know this, so when terms are bandied about in a phone call, even if they are not acceptable, candidates tend not to push back.
Employers are laying a trap to spring in Stage 3, when a formal offer is made. They are building in the ability to claim that "we thought you already agreed" to the prior terms they suggested.
Put a different way, Employers have more leverage than the candidate in Stage 1 and Stage 2, and they try to accomplish as much as they can while they firmly hold most of the cards.
The second reason for more informal offers is to benefit the recruiter. Recruiters want to avoid presenting an Offer Letter that the candidate ultimately does not accept. The recruiter is ultimately evaluated and compensated in the short term for identifying candidates who accept offers, and a formal Offer Letter that is not accepted is an embarrassing strikeout.
The third reason is to avoid having their lawyer get involved until absolutely necessary.
I have noticed over recent years that the quality of Offer Letters has decreased. It seems that non-lawyers are now frequently revising forms once drafted by a lawyer (yes, it's that obvious). I am very sympathetic to reducing unnecessary legal expenses (something I focus on when representing my clients), but this is not helpful to employers when there is a future dispute.
The good news is if you out-lawyer the Offer Letter writer when submitting your changes, it will pay dividends if there is ever a future dispute. I can attest first-hand that well-written key terms in an Offer Letter can avoid millions of dollars in losses for a client when an employer tries to play dirty.
For these reasons, strategic care during Stage 2 has become increasingly important, as it lays the groundwork for what can happen in Stage 3.
Stage 3 -- Reviewing and Negotiating the Offer Letter
It is most common for clients to inquire when they reach Stage 3 -- when they have a written Offer Letter in hand.
At this point, you have hopefully avoided too much lock-in and have the ability to consider and respond to all of the material terms (as well as to the terms that may be missing from the Offer Letter, to your detriment).
Crucially, although there may have been discussion of equity terms (or other long-term financial incentive plans), these terms are governed by separate, dense voluminous additional legal documents that contain wildly variable legal provisions that affect the actual value of the equity grant.
For executives, reviewing the Offer Letter is just the tip of the iceberg in evaluating the likelihood of actually receiving all of the compensation being dangled in front of you. The other documents should be requested and reviewed at the same time as the Offer Letter is considered.
Although there is little chance of negotiating changes to any of the programmatic documents themselves (stock option or RSU agreements, confidential information agreement, etc.), your Offer Letter can be written in a way to override certain terms in those standard company-wide agreements to your (sometimes quite substantial) advantage.
Major Areas of Offer Letters to be Negotiated
1) Title, Who You Report to, Who Reports to You (Responsibilities)
Executives frequently need to report to a certain position in a company in order to be effective and to maintain career growth. Likewise, the description of job responsibilities can be equally important.
These terms are not legally binding on employers, however, without additional legal concepts being introduced into the Offer Letter. Even if additional terms are not negotiated, the reporting relationship terms create an initial understanding and give the executive the moral high ground in any future discussion that ensure around these issues.
2) Location of Primary Work Location & Work from Home
Since Covid, executives should be defining when and where they are expected to work at a company office, and the freedom to work from home, if important to them. Employers are generally free, as above, to change these conditions, unless you get special provisions written into the Offer Letter.
3) Base Salary
Base salaries for my executive clients have been rising tremendously beyond the inflation rate in recent years, due to steadily increasing valuations of emerging companies in technology and sciences. Salary tends to be the most focused-on term by candidates, as it has cultural importance beyond the dollars.
However, for many, salary can be less than half of the total compensation from employment, given the prevalence of equity elements and other beneficial benefits. Beware over-emphasis on salary to the exclusion of other negotiable forms of compensation.
It is impossible to give general advice about salary because it is so dependent on individual factors.
When advising clients, I try to consider a number of personal factors with them in helping them decide what additional salary to seek above that offered in the Offer Letter.
Is there a desire to receive more certain cash over riskier, but larger, potential equity upside?
Is the salary a substantial fractional increase from current employment, as it should be for a recruited candidate? If not, why not?
Is the employer asking for you to accept below market salary by providing truly above-market levels of equity, or just standard emerging company equity?
Is the employer trying to take unfair advantage by anchoring the salary offer closely around the present salary you disclosed in Stage 1 (above)?
4) Annual Bonus
Annual bonuses are common for executives, and should be framed in terms of a percentage of base salary. As your base salary increases, hopefully annually, your bonus amount will therefore increase as well.
These bonuses are usually expressed as targets, and can be paid out at less than 100%, or sometimes above 100%. It is almost always defined as being in the sole discretion of the employer to pay a bonus.
For some executives, it can be negotiated that the achievement of certain goals triggers a special bonus or causes a bonus to become guaranteed.
Standard terms require you to be employed by the company at the time the bonus is paid, and that time is usually some time after the period when the bonus was earned. Candidates can negotiate to strengthen the language around their annual bonuses, to guarantee them in certain situations, to protect payment if they are fired before the company has paid them out, and the like.
In my experience, if an executive is not paid most of their annual bonus target, they are being sent a message about performance, or the company is in financial trouble. Either way, it is time to find another job.
For companies that offer annual bonuses, the most common bonus targets in my experience are 30% and 40%, although CEOs can get much higher, and 25% and 50% are not unheard of.
5) Signing Bonus
I strategize with clients to obtain a signing bonus, sometimes called sign-on or starting bonus. These bonuses are easier to get in hot markets such as that of the past few years.
Most signing bonuses have claw-back provisions, requiring repayment of all or part in the event of departure by the executive within a year. These provisions should be negotiated to minimize the look-back time period, to pro-rate any repayment and to exempt from repayment if the Company fires the executive.
6) Stock Options
Stock options are the greatest creator of wealth for employees ever invented. Historically, they have also been overrated as a component of compensation packages.
This is not because they are inherently bad, but because they have not been fully understood.
Experience teaches all of the things that have to happen in order for stock options to provide the returns commonly expected. Some of the risks that preclude or reduce favorable financial returns can be reduced through negotiation of terms in, and by additions to, Offer Letters.
A safe rule is that more stock options are better than fewer. But seeking more alone may not protect you from getting too little. It is important to know what the entire grant, if vested, would represent as a percentage of the entire fully-diluted equity of the company as of today. Knowing only the nominal number of stock options, no matter how large, or the exercise price, tells nothing about what the value of the options would be under various outcomes.
It is also important to consider how many additional shares may be issued between today and the day you sell your entire stake, because that will reduce your percentage of the total value of the company.
The exercise price of your options is what you will have to pay to exercise your options and purchase the shares. That price is deducted from any gains you would receive when you sell the shares. Beware being told that you will receive one exercise price, then finding that the exercise price has been substantially increased when your option grant is issued (weeks or months after you start work). There are ways to try to protect against this, although companies are required to grant options at current fair market value.
Most stock option grants vest over four years, with the first 25% not vesting until the one year anniversary, with monthly or quarterly vesting thereafter. Vesting schedules can be negotiated to be more favorable to the executive.
Changes requiring acceleration (speeded-up) of your vesting upon the achievement of certain conditions can sometimes be obtained. The negotiation of these concepts is most successfully accomplished when done delicately and with full appreciation of the full context of the corporate situation. Clients have gained additional millions in financial returns from obtaining these provisions.
Detailed analysis of stock options terms, including for how long vested options can be exercised after termination of employment, and methods of paying for that exercise price, should be considered.
7) Restricted Stock Units (RSUs)
Restricted Stock Units of publicly-traded companies are similar to cash compensation. They are taxed as regular income. They have the benefit or detriment of increasing or decreasing in value after they are issued, but before they become yours to sell. Until 2022, in recent years RSUs have frequently held their value, or gained in value, due to the actions of the stock market for young companies in emerging technologies.
Commonly, initial RSU grants are calculated by the employer as some percentage relationship to one's Base Salary, and vest over a period of time, often two or three years. It is convenient to think about RSUs as a contributor to cash compensation, akin to an Annual Bonus.
The best way to analyze an RSU grant offer is to consider what it will be worth annually over its length, assuming no change in the price of the employer's stock.
A $1 million RSU grant (as described by an employer) vesting over three years could be seen as providing about $333k in additional annual cash income, presuming no change in the market price of the stock after the time of grant. Of course, the actual value will depend on how the stock value fluctuates between the time it is granted and the time you can and do sell the RSUs (or are issued cash fro them by the company).
In practice, executives tend to see RSUs as part of their cash compensation, although payment is deferred to vesting dates. As such, RSUs create a retention effect, where it can cause a loss of expected RSU income to leave an employer prior to a vesting date. This also creates situations where new employers need to make up for lost RSU vesting when making employment offers.
In Stage 1, recruiters often seek information about existing RSU grants so as to provide "make good" provisions to cover the losses and make their offers more attractive. Frequently, the "make good" provisions offered do not truly provide equivalent consideration, and require careful analysis and negotiation to render them fully equal to what the executive is giving up by leaving the current employer.
8) Non-competition Provisions
If you are a resident of any state other than California, you can be subjected to enforcement of a non-competition agreement. Non-competes are usually not explicitly set forth in Offer Letters, but instead are included in Confidential Information or Stock Option/RSU agreements.
The requirement of entry into a non-compete is something that should be considered very carefully by an executive, as it can prevent you from earning a living in your chosen and highest-paying field for a year or more. Many people do not realize that an employer can enforce a non-compete even if they fire you.
At a minimum, you need to believe you are being compensated appropriately for providing that benefit to the employer. Non-competes can be narrowly tailored by counsel to potentially be more acceptable.
9) Benefits.
Vacation time can negotiated, as well as the valuable right to be paid for accrued but unused vacation days at the end of your employment. Many employers are attempting to move to "unlimited but no accrual" vacation policies (if relevant state law permits) -- which many employees have found to be quite less attractive than they are touted to be.
Executives with special family health situations may wish to negotiate for employer payment of premiums for executive's existing medical coverage rather than switch to that new employer's plan.
It is possible to negotiate travel conditions (such as business class for international travel), travel limitations or home office equipment reimbursements and the like where reasonable to enhance your productivity.
10) Termination of Employment
No one wants to think about a job ending before it has even been started.
In risk-taking emerging companies, there can be a bias against offering protections in the event things do not go as planned. Employment is at-will and the employer can terminate someone at any time for any reason as long as it is not an illegal reason. The topic of severance protections is therefore sensitive, but is nonetheless worth considering.
A proper severance provision protects an executive if they are terminated by the employer without legal Cause, as defined in the Offer Letter or other company agreements. It does not provide severance if the executive leaves voluntarily.
A proper Cause definition does not include mere job performance issues, but is limited to acts of malfeasance (theft, criminality, violation of policy) or gross failure to act (not showing up for work for weeks on end, etc.).
Severance is usually calculated as Base Salary for a number of months plus continuation of health coverages (or payment of their premiums). It typically does not include continuation of vesting of equity.
The decision to ask for severance is best vetted with a professional who understands the funding situation of the employer and the mindset of its investors.
There are circumstances (such as joining an especially risky or controversial venture, or leaving a secure and enjoyable workplace) where having severance protection makes one able to take a position that would otherwise be unattractive.
11) Good Reason Protections
Where severance protection is available, certain Offer Letter elements that the employer is legally free to alter at will -- such as executive's title, reporting relationships, work location and the like -- can be protected from change to a degree.
The concept of "Good Reason" provides a disincentive for the employer to use its legal power to change these terms affecting the executive by allowing the executive to receive the severance benefits in the event they resign having "Good Reason."
There are certain executive roles where it is important for the individual to have these working conditions assured. If they are not maintained, the executive can leave with severance benefits. Often, when reminded of Good Reason protections, an employer will back down from changes that would otherwise trigger the executive's right to leave with severance.
Conclusion
I hope the above is helpful in figuring out how to obtain and then optimize both compensation and legal terms of an Offer Letter for a great executive position. There are many more issues that could be discussed here, and which should be taken into account, not the least of which is conducting extensive due diligence into the potential employer.
The truth is that the employer knows much more about the position nbeong offered and the state of the company than any candidate can possibly know.
Your goal should be to reduce risks and to optimize your ultimate compensation for your hard work.
When I started ParanzinoLaw over 20 years ago, I wanted to serve the many players in the innovation community who go unrepresented in their dealings. The majority of participants still tend to be unrepresented.
I hope this article helps them. They are doing business against parties represented by some of the very best lawyers in the world.
The few percent who read an article like this to its bottom are the kind who ultimately decide to call or send an email. I look forward to the possibility of adding you into my circle.
You are welcome to visit my ParanzinoLaw website for more information.