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 it 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 bullet 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 Stages 1 and 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. I am very sympathetic to reducing unnecessary legal expenses, but this is not helpful to employers when there is a future dispute.

The good news is that if you out-lawyer the Offer Letter writer when submitting your changes, it will pay dividends if there is ever a future dispute. 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 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 affecting 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 offered. The other documents should be requested and reviewed at the same time as the Offer Letter. Although there is little chance of negotiating changes to the programmatic documents themselves, 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, Reporting Relationships & 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 without additional legal concepts being introduced into the Offer Letter. Even so, the reporting relationship terms create an initial understanding and give the executive the moral high ground in any future discussion that arises around these issues.

2 — 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 to change these conditions unless you obtain special provisions written into the Offer Letter.

3 — Base Salary

Base salaries for 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 total compensation given the prevalence of equity elements and other 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 consider a number of personal factors: 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? Is the employer asking for below-market salary by providing truly above-market equity — or just standard emerging-company equity? Is the employer anchoring the offer closely around the salary you disclosed in Stage 1?

4 — Annual Bonus

Annual bonuses are common for executives and should be framed in terms of a percentage of base salary. As base salary increases, hopefully annually, your bonus amount will 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 at the time the bonus is paid, which is usually some time after the period when the bonus was earned. Candidates can negotiate to strengthen the language around annual bonuses — to guarantee them in certain situations, to protect payment if fired before payout, 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 a sign-on or starting bonus. These bonuses are easier to get in hot markets.

Most signing bonuses have claw-back provisions, requiring repayment of all or part in the event of departure within a year. These provisions should be negotiated to minimize the look-back period, to pro-rate any repayment, and to exempt 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 — 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, 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 them and purchase the shares. Beware being told that you will receive one exercise price, then finding it 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 of 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 corporate situation. Clients have gained additional millions in financial returns from obtaining these provisions.

Detailed analysis of stock option terms — including for how long vested options can be exercised after termination of employment, and methods of paying the 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 and have the benefit or detriment of increasing or decreasing in value after they are issued but before they become yours to sell.

Commonly, initial RSU grants are calculated by the employer as some percentage relationship to 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 employer's stock price. A $1 million RSU grant vesting over three years could be seen as providing about $333k in additional annual cash income, presuming no change in market price after the time of grant.

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 — it can cause a loss of expected 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 to provide "make good" provisions covering those losses. Frequently these provisions do not truly provide equivalent consideration and require careful analysis and negotiation to render them fully equal to what the executive is giving up.

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 are instead included in Confidential Information or Stock Option/RSU agreements.

The requirement of entry into a non-compete 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 be 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 — 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 the executive's existing medical coverage rather than switching to the new employer's plan.

It is possible to negotiate travel conditions such as business class for international travel, travel limitations, home office equipment reimbursements, and similar provisions 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. 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.

Severance is usually calculated as Base Salary for a number of months plus continuation of health coverage. 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 where having severance protection makes one able to accept a position that would otherwise be unattractive.

For more on this topic, see the related article at Severance-Package.com: Negotiating a Better Executive Severance Package.

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 the executive's title, reporting relationships, and work location — can be protected from change.

The concept of "Good Reason" provides a disincentive for the employer to use its legal power to change these terms by allowing the executive to receive severance benefits in the event they resign having "Good Reason." 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 the compensation and legal terms of an Offer Letter for a great executive position. There are many more issues that could be discussed here, 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 being 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.

For additional information, visit ParanzinoLaw.com.