When deciding to leave a company and begin a new adventure, prepare for your compensation negotiation. Once you choose your new path, how do you maximize your financial outlook as well?
Many technology-based companies view attraction or retention of key employees as their #1 problem. There is demand for talent in a limited pool of individuals. The majority of these employers rely on irregular bonuses – spot awards, ad hoc grants, and non-cash benefits – to hold on to key employees.
So how do you get the most out of your career with the company?
- Start with transparency – ask important questions around the health of the organization and the stock option pool.
- Discuss your executive compensation package to ensure you understand the implications of:
- Long-term incentives
- Peripheral negotiations around severance, vacation days, etc.
- Terminology used in your vesting agreement
Remember: Negotiate for what is fair – they are offering you a job you love.
3. Conclude with shared meaning – you both want long-term value creation.
Long-Term Incentives (LTIs)
As you head to the managing and executive level of business the ratio of LTIs to total compensation increases. Many mid- to large-companies provide current value awards (RSUs or phantom units). Some smaller tech startups will provide retroactive grants to give you in-the-money options.
Review your performance-based plan. Is there a cash component? Only equity? Consider the risk you are willing to take. Do you need more cash annually to set aside for your financial goals? Can you take the risk of asking for a heavier equity allocation? What are the tax effects? Depending on where the company is with their cash, it may be easier to obtain additional equity compensation than salary.
Peripheral Negotiations
When you reach the maximum compensation a company is willing to give you, ask for additional protections or benefits.
Do you like to travel often? Discuss what a typical week looks like and when working from home may be allowed. Ask for additional vacation days. If they have a plan with levels of additional days per number of years worked, you may be able to ask for the highest level benefit.
Are you taking a huge risk in a department that may flop or go big? Consider asking for a short time frame of severance if you are terminated. A safety net to get back on your feet can make a huge difference mentally. Just make sure you read the terms closely to know under which scenarios pay out will occur.
Ensure your agreement includes indemnification protection. Directors receive it, and as an executive you should too. If applicable, think about an umbrella insurance policy and directors and officers policy.
Terminology
Make sure you understand the terminology in your vesting agreement.
When the vesting schedule accelerates
- Acceleration based on termination – Does this mean any termination? Termination without cause? Leaving for good reason?
- Acceleration based on a merger or acquisition (change in control single trigger) – Do you receive an additional year of credit? Or a shorter or longer time period?
- Understand when your vesting accelerates and when it doesn’t. This will help you evaluate the risks of your incentive compensation long term.
Golden Parachute / Tax Gross Up
Key employees may receive severance packages. If your agreement pays out three times your average compensation (over the past five years) at the end of employment, review your agreement to ensure you receive a 280G payment projection.
A 280G payment is an additional tax burden for ‘golden parachute’ severance packages. The 280G payment projection will display potential tax due and any gross up of taxes by the company.
The gross up would include income and excise taxes due for golden parachute packages. Also, ask for a reimbursement for additional expenses in connection with an IRS audit claiming further tax due to the 280G payment and gross up. You shouldn’t be liable for a miscalculation made by the company in grossing you up for the applicable tax.
Thoughtful conversations around executive compensation can make a distinct difference over time. Planning for a successful negotiation with your new company allows you to focus on your job and know the risks and rewards applicable to you.
If you aren’t sure where to start, contact us about a quick start project to help you.
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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
