Mar 08
Employment Agreement
in Mergers and Acquisitions
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An employment agreement is a formal employment agreement that addresses key terms and conditions of a person’s employment. It’s also commonly referred to as a senior management agreement or SMA. The following issues are usually addressed in an employment agreement:

  • Job - what is it exactly - title?

  • Responsibilities - what are the employee’s responsibilities

  • Position flexibility - is the employer able to change the position?

  • Time - how much time is covered by the employment agreement - one year? two years?

  • Compensation - what’s the salary? the bonus? any benefits?

  • Stock Options - is the employee eligible for stock options? if so, how many? what’s the vesting schedule?

  • Terminating / Good Cause - defines what “good cause” means in context of being able to fire / terminate the employee

  • Terminating / Without Cause - states when / how the employee can be terminated without cause. And, denotes amount and terms of severance payments.

  • Obligations - what are the employee’s confidentiality obligations? any other obligations?

  • Dispute Resolution - Where and how disputes will be handled

Further Discussion - Key Points in a SMA

  • Description of Job Duties

    • Title of Position - this is important. generally, the agreement will state that changing of title of position usually is a demotion and could entitle the employee to severance, etc.

    • Job Responsibilities - what duties is the employee supposed to perform?

    • Loyalty -basically, language that highlights the fact the employee needs to be loyal to the company. This sic ommonly called “duty of loyalty and best efforts”

    • Where and When - agreements routinely specify the location and hours of employment

  • Compensation Terms

    • Base compensation - employee receive a salary, hourly or commission pay?

      • If it is a commission arrangements, then normally there will be explanations detailing when commissions are earned, ability to take draws and what happens to any commissions on yet to be closed deals if the employee is terminated.

    • Incentive programs - stock options, bonus payments, profit sharing?

    • Expenses, allowances, etc. - does the employee have some monthly expense limit? allowance for cell phone? car?

  • Benefits

    • Insurance - health, dental, vision, life, disability and professional liability insurance

    • Professional Memberships - will the company pay the dues or membership fees for an employee to belong to any professional organizations? This would also include any licenses that the employee needs to perform his / her job.

    • Vacation and Holidays - how much time off does the employee get each year? how many holidays?

    • Retirement - For example, does the employee get a pension or 401(k)?

    • Educational Reimbursement - will the employee be eligible to receive reimbursement for educational expenses? For example, if the employee enrolls in business school or takes executive education classes.

  • Length of Agreement

    • Term - is it a one year agreement? two year?

    • Extension of Agreement - is there any automatic extensions? mutual options

  • Performance Benchmarks

    • Production Benchmarks - Examples include operating profit, earnings or EBITDA. These benchmarks could be based on dollar amounts or annual growth rates.

    • Marketing Benchmarks - new customers or accounts that have been signed up. Again, these benchmarks could be based on numbers or growth rates.

    • Skills Enhancement - this could be either the employee or the employee’s team. Basically, company’s want to ensure that its employees are motivated to

    • Other Benchmarks - basically everything else. If the company is a relatively young company, there could be a benchmark for capital being raised, etc. Or, a benchmark could be established for building out a management team, etc.

  • Termination

    • Good Cause or No Cause

    • Losing License - if the employee needs a license for the job and loses the license, it makes it hard for the employee to work. Therefore, employers usually have a clause stating that if an employee loses his license, the employee may be terminated.

  • Covenants - these are basically obligations or restrictions for the employee - both when the employee is working at the company or if the employee leaves the company. Here are some common covenants in employment agreements:

    • Non-Disclosure - employee agrees not to share or disclose trade secrets and other proprietary information (e.g., customer lists)

    • Non-Solicitation Agreement - employee agrees to not solicit the company’s customers if the employee leaves for some period of time (e.g., 12-18 months)

    • Non-Recruit Agreement - employee agrees not to directlyrecruit employees from the company for some period of time (e.g., 12-18 months). A - is also referred to as a non-solicit of employees. People typically can get around this by placing a general ad in a newspaper, etc.

    • Notify Management of Any Wrongdoing - basically, if you see someone doing somewhere wrong or illegal, you should inform senior management.

  • Property Rights

    • Existing Clients of Employee - if the employee is a revenue generator and comes aboard with customers, who retains if the employee leaves the company? Basically, is the employee able to take the customers with him.

    • New Clients Generated Once Working at the Company - similar to the above clause but now dealing with the customers the employee generated after s/he started working for the company.

    • Materials Returned Upon Termination - if the employee leaves, what does s/he have to return? Normally, this is all documents pertaining to the company.

    • Copyrights, Inventions and Patents - if the employee develops patents or creates content, who holds the rights - the employee or the company? Generally, the company will hold these rights since the employee developed them on the company’s dime so to speak.

  • Miscellaneous Clauses

    • Accuracy of Representations - did the employee provide accurate information regarding his work experience, etc. This basically is in the agreement to ensure employee is being honest.

    • Attorney’s Fees and Costs - who’s responsible for attorney’s fee - both in reviewing the agreement and in any potential claims brought against the employee.

    • Indemnification for Third Party Claims - if someone or another business sues the employee and the company, does the company protect the employee?

    • Mediation and Arbitration Provisions - if there is a dispute, what’s the mechanism to resolve it?

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