Your employer has told you that it intends to terminate your employment. It has offered you a severance payment if you are willing to sign a separation agreement, including a release of claims. What should you be thinking about? Although every situation is different, there are a few specific questions that everyone should ask before deciding whether to accept the offer, negotiate for more, or simply walk away.
1. Do you have grounds to seek full vesting in your equity and payment of any existing target bonus?
It is very common for employees to be compensated with equity (stock options/restricted stock/RSUs) and an annual (or perhaps quarterly) bonus. Equity compensation usually vests over a number of years and becomes due as the employee provide “continuous service” to the employer. Bonus payments are often contingent on reaching certain specific personal, team and company-wide targets. Many bonuses also require that the employee remain employed through a particular date and specify that they are not “earned” by the employee until then.
So, does this mean that your employer can always avoid paying equity or bonus compensation if it chooses to fire you before the applicable vesting date for the bonus or equity? No. Under California law, an employee has a right to become fully-vested in their equity and receive any previously promised bonuses if they are wrongfully terminated prior to the milestone date stated in their bonus or equity agreements.
One of my prior posts explains the development of the law in this area but the logic is simple. Your employer contractually agreed to provide you with a benefit (equity vesting/a bonus). You satisfied your end of the bargain by performing services. But the employer denied you the opportunity to receive the benefit by improperly terminating your employment before you could complete the contractual term.
Thus, your first question should be whether there is any reason why your termination violates California law or public policy. Every situation is different but some of the more common examples include terminations motivated by discrimination based on a protected characteristic, failure to honor a protected leave of absence, retaliation for reporting misconduct or non-compliance with an employment law (for example, wage and hour rules), harassment, or breach of an employment contract. If you feel there may be grounds for a wrongful termination claim then against your employer then, obviously, it may be helpful to talk to a lawyer. The key point, however, is that if such a claim does have some factual and legal support then you have significant leverage to negotiate accelerated vesting and payment of a bonus as part of your separation package.
2. Does your employer have a severance policy?
If you have no reason to believe your termination was wrongful, this does not mean your employer will not agree to provide you with a significant severance payment in exchange for a release. Many larger companies have formal, written severance policies (e.g. 2 weeks’ pay per year of service). Other companies have an unwritten but well-known and commonly-followed practice of paying severance based on a formula. This practice may obligate the employer to the same extent as a written rule. These severance policies set a floor on what you are entitled to, not a ceiling. Thus, you should be sure the company has honored its existing severance policy and then ask the next question.
3. Is there a particular reason why the employer wants you to sign a separation agreement?
There are many reasons that companies are willing to pay severance even if they haven’t violated an employment law. For example, you may have been an early employee at a startup that is seeking to raise venture financing. The company may believe its prospective investors will be more comfortable if diligence shows that all former employees have signed releases.
Or you may have created IP for your employer but the employer forgot to have you sign an inventions assignment agreement. Thus, the company may be desperate for you to assign all relevant IP rights as part of your separation so that there is no uncertainty as to who owns the IP its business uses.
In other instances, your services may be desperately needed on a short-term transition basis. You may be able to quickly negotiate an incentive-laden agreement if you threaten to leave the company rather than staying for the transition period they imagine.
Maybe the company is considering selling itself in an M&A transaction in the medium term and doesn’t want any potential employment claims showing up in the diligence process. Similarly, if your employment agreement contains a provision that provides you with certain benefits upon a change in control (“single trigger”) then the company may be hoping to get a release signed quickly so as to avoid having to follow-through with those commitments. And, if you think this is a real possibility, you should negotiate for added rights if a change in control of company occurs within specified period after you sign agreement.
More generally, many companies simply wish to buy goodwill and are willing to pay a lot for a departing employee’s agreement to refrain from future disparagement. Thus, it’s quite possible to convince your employer to provide a significant amount of severance even without threatening a claim for wrongful termination.
4. Are there any unique issues that should be addressed because you were an early employee, large shareholder or a partner/member of an ongoing investment fund?
Individuals who founded a company and/or hold a lot of its stock may want continuing information rights similar to what large investors and board members receive. They may also want to hold their seat on the company’s Board of Directors or remain “Advisors” to the company after the separation. Former partners or members in partnerships and LLCs may have ongoing obligations to the entity that should be minimized. For example, some funds agreements contain draconian terms that result in a loss of vested equity if a former member does not make a small contribution on time. Or there might be issues regarding to what extent the fund’s expenses will continue to be passed onto a departed partner’s share of the profits. Similarly, a large shareholder at a new company may want to seek anti-dilution protections (but, in my experience, those will not be granted absent exceptional circumstances). If these issues apply, then it’s best to resolve them with an agreement upon separation rather than having lingering uncertainty.
5. How will your response affect continued relations with your former employer?
Most employers don’t take it personally if, upon being terminated or pushed out, you negotiate for additional severance benefits. This is part of their cost of doing business and the employer generally wants to feel like it treated you fairly. Moreover, engaging an attorney to handle the negotiation for you will help to remove many of the raw, emotional and deeply personal feelings that emerge in these situations.
Nevertheless, if there is a reason why you need to maintain significant, future business or personal relationships with your former employer then it probably does not behoove you to reject a good offer on the slim chance that an aggressive negotiation posture will allow you to get a slightly better deal. For example, no one will take it well if you cook up a bogus wrongful termination claim in an effort to secure additional vesting. But considerations about comity apply to a much lesser extent if you really were treated unfairly, you don’t expect to have ongoing relations with your former employer, or if walking away from the deal costs you very little since the offer initially proposed by the employer wasn’t very valuable.
Additional items you may want to request as part of the agreement:
After you have worked through these crucial questions and decided to negotiate over the terms of the agreement, then you should consider which of the terms listed below are most appealing. Many of these terms are not particularly controversial and companies will be flexible if you only ask for a few of them. A lawyer may be able to help you prioritize your requests.
- Can you delay your separation date in a way that allows you to remain employed, and receiving a salary, while you look for a new job?
- If not, do you want to request unpaid leave that would allow you to remain “employed” in a technical sense?
- Will your employer agree to COBRA reimbursement or continuing health coverage as an “active employee” for a continuing employment period with few responsibilities?
- Will your employer agree to extend the period of time you have to exercise vested options?
- Are you subject to any material restrictive covenant (non-solicitation, non-compete) that you can have removed as part of the agreement?
- If you are being paid severance, can it be paid in a lump sum rather than over a period of time?
- Do you want to retain any employer-provided property (cellphone, laptop, printer, work product that is not confidential or material to business)?
- Do you want to retain or obtaining title to any company IP that you created (generally only an option at a small/new company)?
- Will your employer agree not to challenge your application for unemployment benefits?
- You can ask that the release be mutual but in my view this sort of mutuality is rarely of much value to a departing employee and economic terms should generally be prioritized. The same goes for mutual non-disparagement and mutual confidentiality terms.
- Obtain “letter of recommendation” or LinkedIn reference and agree upon content of response to future employers’ reference checks
- Ensure 409A compliance with any extended payments
- If your employer is in another state, have the agreement designate the state where you live as the jurisdiction and venue for any legal disputes about the agreement.
I have negotiated and drafted hundreds of separation agreements for employees, executives, companies, and investment funds. Click here to contact me. I would be happy to discuss your particular situation with you.
Disclaimer: All materials have been prepared for general information purposes only to permit you to learn more about Sebastian Miller Law, P.C, its services and experience. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.