How to Evaluate a Job Offer Letter and Negotiate a Better Deal: A Lawyer's View
by Gary A. Paranzino
Copyright 2002-2019. (Update pending -- but the general principles still apply). Bookmark this site for future reference.
You are an executive or senior employee who has just received a verbal or written job offer.
Perhaps the company is an emerging technology company, possibly venture capital-funded. Whether you are coming from a similar company, or a large, more traditional employer, the Offer Letter may come as a bit of a let-down. It may be only a few pages long. It may read like a form letter, with your name, title, salary and stock option information filled-in. Perhaps you received it by e-mail.
Be careful not to let the informality of the company's approach to lull you into nonchalance. This Offer Letter sets forth what you and your family will receive in return for your blood, sweat and tears for the next untold number of years. The Offer Letter was probably drafted as a form by an employment lawyer with a large law firm, and it is carefully crafted to protect the company's interests. (If you received a longer, more formal-looking Employment Agreement instead, you simply have that much more legalese to wade through and understand.)
Even though you may have negotiated your salary and title, the negotiation is not necessarily over. There are a number of other terms of significant import to the job candidate that the Offer Letter also addresses, or fails to address by design. Do not be discouraged from negotiating by the oft-utilized canards that the offer is "the best the company can do" or that "everyone at your level has the same deal". A rational company will always listen carefully to the well-considered positions of a candidate it values. Besides, you just may be better advised than those prior hires.
So how do you proceed?
The following are general points which reflect portions of the collaborative process I typically use with clients to evaluate, strategize and negotiate an optimal set of employment and compensation terms:
1) Think hard, find a sounding board.
Engage in an evaluation of your employment history, career goals, knowledge of the company and the particular practices of its sector, your work style, financial goals and comfort level in negotiating with your future employer. Hash out your reactions to the terms of the Offer Letter, both the major financial terms and the implications of the obscure legal terms. Draw upon the experience of someone who has first-hand knowledge of the compensation practices of companies in the sector, and determine a set of requests to be negotiated.
2) Adopt a posture.
Adopt and communicate a negotiation posture to the company. The posture must integrate several competing interests at once -- your strong interest in the company and the job, your thoughtfulness about what compensation terms you need in order to take the job, your firmness and deliberate demeanor and a projected sensibility that whatever happens during the negotiations will not affect your future job performance or your interpersonal relationships with your colleagues. Once this posture is successfully established and communicated, there is practically nothing you cannot fruitfully attempt to negotiate.
3) Control = success.
Control the negotiation process and drive the resolution of issues. This is not as hard as it may seem. Control over the process can be achieved in most cases by seizing the initial workload and drawing a clear road map for resolution and completion of the process. For example, I will often initiate a negotiation in the following manner: "I understand that you and Mr. Candidate have reached a consensus on the outlines of the compensation and job responsibilities. Our issues generally relate to wording of portions of the Offer Letter, some issues around the edges of the compensation points and a few issues that the Offer Letter does not directly address that we would like to address in the interest of clarity. We will prepare a document with our comments and we'll set up a call to discuss the broader points then let the lawyers work out the smaller details -- preferably off-line without involving the principals. I foresee Mr. Candidate being able to sign the revised Offer Letter prepared by your attorney before the end of the week."
4) Have a clear strategy.
Prioritize your requests into three categories, deal-breakers for you, minor issues and deal-breakers for the company. Do not fall into the trap of conceding a point in isolation simply because it does not matter to you -- weigh your concession based on what it means to the company. Obtain something of equivalent value in return.
5) Creating momentum to close the deal.
Start with an open book, then quickly work to narrow the list of open issues. The company, by presenting a written Offer Letter, has opened the door to a discussion of whether the document as drafted accurately reflects the expectations of the candidate during the recruitment process. Once you have established the legitimacy of addressing all issues in the Offer Letter, you should make every effort to demonstrate a commitment to obtaining final resolution of issues that can be agreed to. Often, there are minor issues which can be sacrificed to establish goodwill. This creates a palpable sense of progress which can become a powerful rationale for the company to agree to your more important requests in the interest of getting you on board quickly.
6) Always trade major issues.
Resist pressure to concede important points in isolation. If the company is waiting for word from the Board on a point important to you, do not concede a point important to the company in advance. I have found that honesty can be quite effective in this situation. "We know that that is an important point for you, and we are reasonable people, but until we know whether you can make progress on our big issue we have to table your request for now."
Compensation and Employment Terms
7) Keep what you already have.
Scan your memory, notes and any e-mail received from the company regarding compensation issues, and carefully cross-reference your expectations against the terms of the Offer Letter. The person preparing the Offer Letter may have had only a cursory discussion with the hiring executive. Often, crucial details are unintentionally misstated or omitted. Do not assume that any term at odds with your expectation is intentional, but do assume that the person preparing the Offer Letter will err to the benefit of the company.
Salary is a difficult issue to address broadly, as it turns completely upon the particular facts of your situation. If you first learned of your proposed salary in the Offer Letter (which is not as uncommon as you might think) consider it fair game to negotiate it aggressively. If you previously heard a salary number bandied about, but never expressly negotiated and accepted a particular salary figure, proceed more cautiously, taking into account the fact that people treat salary matters differently than almost any other aspect of an employment negotiation. A little diplomacy goes a long way -- your future boss might not mind giving you a large signing or performance bonus, but might not want to pay you a salary larger than that paid to the company founder or to themselves. If you had arguably assented to a salary number during the recruitment process, tie your request for a higher figure to the company's resistance to other of your requests. For example, to illustrate the concept, you might say "I was willing to accept 150k when I thought you had standard four-year stock vesting, but now that I've learned it takes five years to vest, I really need to ask for $175k."
9) Get it now.
Recognize that it is substantially easier to increase your salary, bonus and stock options before you start your new job than it is once you join the payroll and become subject to company compensation policies.
10) Money is money.
Consider substituting pre-defined bonuses for salary where the company appears to be genuinely restricted in meeting your salary target. The path of least resistance may be to propose a bonus structure or two in place of that higher salary.
Bonuses go into your pocket and, unless you agree to some sort of give-back scheme should you leave the company, they don't come back out. A written bonus provision that provides no "outs" for the company will pay off as long as you are still employed when it comes due. (You can attempt to negotiate that too). Consider requesting the following bonuses if they apply to your situation:
Signing Bonus (aka sign-on or starting bonus)
Relocation Bonus (relocating to take a job costs more than just moving expenses, negotiate a lump-sum grossed-up for taxes to cover all of the unexpected expenses of being happy in a new location)
Cost-of-Living Bonus (when moving to an area with a notoriously high cost of living)
Retention Bonus (payable on a periodic basis if you remain employed by the company)
Performance Bonus (payable upon achieving certain objectives, negotiate mutually-defined performance targets to be determined periodically)
Sales/Revenue Bonus (payable periodically based on the level of revenues generated by the company, your department or your activity, company profitability or other measurable financial criteria)
12) Equity interests.
Equity interests -- actual or potential ownership interests in your employer -- are some of the most attractive elements of your compensation, but are difficult to value in a practical manner. This article addresses stock options, but some other equity interests beyond the scope of this article, such as founders' stock, grants of restricted stock, warrants, and other less common devices, are worth considering. Stock options are the right to purchase stock in one's employer over a period of time for a set exercise price. The financial and tax impact of stock options, the differences between incentive stock options and non-qualified stock options and the increasingly negative impact of the Alternative Minimum Tax (AMT) on those who exercise options is complex and beyond the scope of this particular article. Professional advice should be obtained with regard to these issues from your personal legal and/or tax advisors based on your particular financial situation. (Continue reading for a discussion of what to ask for and how to negotiate more stock options.)
13) Stock options.
It has been established that employees often overvalue the stock option grants they receive, making them attractive substitutes for cash for the companies that issue them. Nonetheless, the prospect of earning a potential ownership stake worth many times your salary is a combination that may not have an equal in the American workplace. Shareholders like the incentive that stock options create for employees to align their interests wholly with those of the employer and the shareholders. Commence a negotiation over stock options with the knowledge that even many senior corporate executives are unclear on exactly how their option grants operate in all likely scenarios. The more you understand about the details of your stock option grant, the stock option plan under which it is issued and the corporate governance principals of the company the greater the likelihood that you can negotiate for more options under more favorable exercise terms, and realize substantial upside.
14) Ownership interest.
A threshold analysis of any offer of stock options requires understanding of what share of corporate ownership the grant potentially represents. Has the company indicated a particular number of options to be granted? Have they indicated what percentage of the company's presently issued and outstanding stock this grant would represent, if the option grant were to become fully vested? In determining whether the grant is large enough, only an analysis of percentage ownership is meaningful. Nominal figures themselves, such as "100,000 options", have no meaning without comparison to these other figures. A person experienced in your chosen industry may be able to provide an estimate of typical ownership ranges for executives of certain responsibility levels. It is crucial to consider the effect of the future dilution of your potential ownership interest resulting from anticipated financing rounds.
15) Upside potential.
It is not enough simply to assume that "the sky is the limit" for what your stock options may someday be worth. This assumption can lead to making unnecessary and costly compromises in other important areas of your compensation package. Instead, consider a reasonable success scenario, possibly an IPO or an acquisition. Remember that unless the company takes the extraordinary step of granting you options at an exercise price below the current fair market value of the shares, on the date of grant the exercise price and the value of the stock are the same. Other than the time value of the option, which can be quite valuable, the option is not yet "in the money". The value of the company's stock must appreciate before your options are "in the money" -- that is, worth exercising. Calculate your ownership percentage of the potential aggregate market value of the entire company in the future, less the exercise cost of your options, discounted by the probability that this success will actually be achieved. Discount further to account for the numerous liquidity hurdles that exist for executives seeking to sell shares. Is this number what you think it needs to be in light of the other elements of your compensation package and job responsibilities?
16) Vesting options.
How many years must you work before you are vested in the entire number of options being presently offered? Recent developments indicate that, given the volatility of corporate fortunes, especially in the technology area, the odds of remaining happily employed with one company for four years may be lower than previously anticipated. Is there a "cliff", a waiting period, before your options begin to vest? It is common for a four year stock grant to vest one-quarter after twelve months, and to vest monthly thereafter over the remaining three years. Many developments can occur in both the company's life and your personal life to cause you to terminate your service as an employee before that cliff has ended, leaving you with no vested options for your experience. Likewise, some grants vest only annually. Consider negotiating a better vesting schedule. Most stock option plans allow the Board or management to set variations in vesting schedules with the stroke of their lawyer's pen.
17) Exercising vested options.
Pay attention to how long you have to exercise vested shares after leaving employment with the company. Usually, this period is 90 days or less. Options, as incentives for performance, seek to keep employees in the employ of the company. Once you leave, the company wants to "divest" you of your unexercised options. If the options are not "in the money" -- valuable -- at some point during that period, you are not economically motivated to exercise them, and they will expire worthless. This post-employment exercise period can sometimes be profitably extended through negotiation.
18) Stock option documents.
The documents setting forth your stock option grant and the plan under which the options are granted are crucial documents that you (or more fruitfully, your professional advisor) need to read prior to executing an Offer Letter. Additional issues to focus on, other than those set forth above, include what happens to your options in the event of a merger or acquisition of the company, whether you can engage in a cashless exercise, what happens in the event you leave employment voluntarily, or are terminated by the company with or without "cause" as that term is defined and what restrictions exist on sale of stock acquired pursuant to the options, both before and after an IPO.
19) Termination of employment.
Think hard about the need to protect yourself from the risks of joining an emerging company that may not be in a position to control its own destiny. Executives coming from stable and lucrative established companies or careers, relocating, joining troubled companies or otherwise destabilizing their careers in order to accept a job offer should negotiate a severance package and the terms under which it is triggered in advance, in the Offer Letter. While this sounds defeatist, it is the ultimate way to exercise substantial control over your destiny. Most technology companies craft employment to be at-will in states that allow it (even for their most senior executives). This in essence means that the employee has no future right to be employed by the company, even on the first day of the job. While it is framed that the employee likewise has no obligation to stay with the company, this is a right the employee already has -- it is nearly impossible to get a court to require an individual to perform services against their will. When you begin to consider all of your professional and financial interests at stake in an employment relationship, you recognize that at-will employment presents significant risks.
20) More on termination.
While it is possible to negotiate an employment contract providing for employment (or continued salary and benefits) for a specific period of time, that is beyond the scope of this article. Suffice it to say that guaranteed employment contracts of this type are disfavored in the world of technology companies. Protections are more typically provided instead through severance benefits in the event of termination. As with all of the issues raised in this article, professional advice is advisable to obtain the desired results. Reduced to the most basic concepts, termination of employment can occur through your voluntary resignation, termination for "cause" by the employer (best defined for the employee as limited to some kind of illegality or other objectively improper conduct on the part of the employee), termination without cause (covering terminations resulting from budget cuts, layoffs, changes in strategy, poor job performance or no reason at all), disability or death. You can define what compensation should be paid under each of the foregoing circumstances, with compensation forms including, for a period of time, continued salary, continued payment of bonuses, continued employee benefits including health insurance, continued vesting (or acceleration) of stock options, lump sum payments, retention of company office equipment or peripherals, provision of favorable job references, continuation of e-mail and voice mail, etc.
21) Even more on termination.
An artfully crafted deal may further provide additional protections and consideration to the executive in the event of a merger or acquisition of the company, impending insolvency, a detrimental change in your salary, bonus opportunity, job title, job function, job responsibilities or reporting relationships or the failure of the company to promote you to a certain position within a fixed period of time. The available protections and consideration include accelerated vesting of options and the payment of the severance benefits previously discussed above. The only limit to these protections is the job candidate's (and advisor's) imagination.
It is crucial to review your Offer Letter and other documents proffered to you prior to or after the start of employment (or better, have them reviewed by a professional) for elements of a non-competition agreement. These agreements seek to prevent you from working for another company for a period of time after leaving the company. Depending on the state you live in, where your employer is located and where you want to work next, these agreements are either valid and enforceable, or largely unenforceable. They can catastrophically prevent you from earning a living in your chosen profession for a period of years. Non-competes need to be narrowly tailored if they are to be acceptable to you at all, and it is advisable to carefully define when they are triggered, such as depending upon whether the employee leaves voluntarily or is terminated by the company. Better yet, an employee subject to a non-compete should require that the company provide a lump sum payment of salary and benefits in advance upon termination of employment for the potential period of subsequent unemployment imposed by the company.
23) Non-solicitations, confidentiality and invention assignments
You will likely also be requested to enter, either in the Offer Letter or in related employment documents, an agreement not to directly or indirectly solicit the employees of the company to join another venture for a period of time, an agreement to protect the confidences of the company as defined for a period of time, with penalties and remedies for your breach set forth in detail, and to assign ownership of all inventions and other intellectual property created by you while an employee and to assist the company in obtaining patents and other expressions of ownership of such intellectual property by the company. Conceptually, these documents are all very commonly agreed to without significant negotiation by employees. Nonetheless, a properly experienced lawyer can advise you in detail whether these types of provisions contain non-standard terms that impair your rights to an unusual and unacceptable degree.
24) Other benefits.
You can negotiate to set the number of weeks of vacation to which you are entitled and your right to be paid for unused vacation days at the end of your employment. You can protect yourself against waiting periods for employee benefits to kick in, having the company reimburse any expenses resulting from such delays (such as paying your COBRA during the interim). You can define special office equipment to be provided to you (Blackberry pagers and cell phones and the related service plans, reimbursement for home office communication expenses and equipment), whether you can travel first or business class on business trips, essentially anything that is important to you and reasonable for the company to accept in order to obtain your services.
I hope the foregoing has been helpful and has stimulated your thinking about what you might seek to negotiate for in your new position and how you might go about successfully obtaining it. Certainly a decent sized book could explore many more of the nuances which arise in each case. I sincerely hope this modest effort at setting forth a real-world approach to executive compensation negotiations has helped to fill the gap in freely-available information on this important subject.
I cannot overstate how valuable an experienced legal advisor can be in evaluating an Offer Letter or Employment Agreement, and all of the related documents (the stock option plan document, the stock option grant document, the confidentiality agreement, the invention assignment agreement, the non-solicitation agreement and the non-compete agreement). Focusing on the many suggestions above, it is likely that the right advisor could help you obtain additional compensation and terms that would cover and possibly exceed the cost of obtaining such advice.
When your deal is done, don't forget to enjoy your good fortune. Emerging companies provide an incredibly challenging work experience, respectable standards of living, and the rare possibility of earning real wealth that can transform the lives of you and your family. After employing the concepts in this article to make what I hope will the best deal yet of your career, I'm certain you will give your employer the benefit of the bargain and reward it for its belief in your capabilities -- by earning every dollar, and then some, with outstanding job performance.
Copyright 2002-2019 Gary A. Paranzino
The author represents individuals who are negotiating new employment arrangements. Many clients work with Gary Paranzino behind the scenes to set a strategy for enhancing their job offers.
Learn more about leveling the playing field when negotiating a job offer.
For information on negotiating a better severance package upon leaving a job, see the author's related article.
Gary A. Paranzino, admitted to practice in California and New York
650-331-0525 || 212-655-5435
By e-mail: firstname.lastname@example.org
Gary Paranzino has practiced law for three decades. He served as General Counsel and Chief Legal Officer for two prominent venture-funded technology companies, PointCast and Ashford.com, where he negotiated and drafted offer letters, employment agreements and separation agreements for CEOs, executives and employees.
Previously, he represented Wall Street firms and media companies in high-profile litigation in New York. He is a graduate of Cornell Law School (J.D.) and Cornell University (A.B.).
Today, in private practice, he spends a significant proportion of his time representing executives and employees entering and leaving technology companies, financial firms and multinational corporations.
Visit Paranzino's web site for more information.
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