Executive Retention Packages-Terms and Negotiations

By Robert A. Adelson, Esq.

In your executive career, you may at times be presented with lucrative job offers that you can’t resist, or your employer may become the target of an acquisition or merger, and the company owners want to assure that essential management employees do not leave in the months leading to the sale. In these situations, a retention agreement may be called for, either initiated by the Company or by yourself. This article explains why companies want retention agreements, how to negotiate your executive retention package, and the key terms you should seek to protect your interests. 

Why Companies Want Retention Agreements

When you are seriously considering a new job offer, before making a move, you should assess whether your value to your current employer would justify a retention agreement, one that can be a “win-win” for both sides. Here are some circumstances where a company may consider a retention agreement to keep a key executive in place:

• Your Company is near a critical milestone that could lead to a liquidity event.
• Your Company is planning to seek new funding.
• Your Company is planning for an IPO or needs an executive lockup as part of its IPO process.
• You have close relationships with key customers, and your Company fears losing those customers.
• You have close relationships with key management and performers in your Company, and your departure may trigger significant attrition.
• You are a key inventor, innovator, or technologist in the creation, maintenance, or development of your Company’s main product.
• You have achieved a level of notoriety such that your departure may cause your Company to lose goodwill within the customer or business community that it operates.

If any of the above circumstances apply to you, you can approach the Board or the CEO to indicate that you are considering leaving the Company and invite them to negotiate a retention agreement with you. 

How to Propose a Retention Agreement

Your retention agreement discussion should 

• Review the key values you bring to the Company over the near term, 
• How those values would be lost to the Company, and even if they could be replaced, there would be a gap until that occurs even if a capable replacement could be found, 
• Quantify in dollars to the extent possible what your departure could cost the Company, 
• Indicate your willingness to aid the Company to reduce the negative impact by negotiating a retention agreement,
• State terms you are seeking and how those costs are so much smaller than what the Company stands to gain by your staying in place. 

Where the Company’s need is short term, it may negotiate to defer your start time with the new Company. Alternatively, it could be you start the new job but do the retention as part-time consulting. 

Negotiating Your Executive Retention Package 

The key idea of retention compensation is that you have worked for a significant period of time for the Company and built a significant level of value there. Thus, when you propose your retention compensation package, it is best to frame it as a small portion of the benefit or potential payback your Company will get by having this retention agreement with you.  

For example, suppose the Company is nearing a certain milestone that is a key condition to their closing a $10 million A round of financing within three months, and your role is so important that should you leave, it would take them a year or longer to recover from your loss. Then if you seek a retention package valued at $700,000, with the majority of that value paid only after the round closes, the Company could certainly visualize a significant payback (over 10 to 1) to pay the retention compensation to keep you in place over this critical period.

Terms to Seek in Your Retention Package

A good starting point in negotiating your retention agreement would be to revisit issues from your original executive employment negotiations, especially if you were not in a good bargaining position or lacked expert executive employment counsel at that time. Now that you have proven yourself and your bargaining position is strong, you may get your Company to concede to those original asks. But you should not stop there because you are now an insider with much knowledge of the Company’s financial position and prospects, and you know the value your continued employment can bring to the Company.

Some of the components of your retention package are the following:

• Retention signing bonus and salary raise
• Revisions to determination and level of executive bonus
• Grants of base and incentive equity, with the right mix of RSUs, restricted stock, ISOs, and non-qualified stock options, structures to reward loyalty and results and allow tax-favored capital gain tax or QSBS treatment to the extent possible
• Revisions to severance terms to allow you a single trigger of severance if terms on which you relied are not met
• Revisions to severance terms to pay not only base pay or a multiple of that, but to also make you whole on bonus, benefits, and equity

In conclusion, if you have achieved a level of success in your current position and there is an important need for you to stay, even when a new job beckons, you would be wise to consider seeking retention before you leave for the new offer – this could be a win-win for you as well as your old employer, and still cause no great inconvenience to your new employer. 

Robert A. Adelson, Esq. is a corporate and tax attorney and principal of Adelson & Associates, LLC, Boston, Massachusetts. https://www.executiveemploymentattorney.com  He represents CEOs, C-Level, and senior executives on various issues, including employment terms, tax-favored equity, bonus and LTI compensation, change of control, retention, separation, wrongful termination, noncompete, and restrictive covenants. Email: [email protected] 

© 2022 Robert A. Adelson