Upon learning that a business is contemplating a sale, employees often become nervous about how changes in ownership and management may impact them and sometimes seek other opportunities before the sale can be closed.
Loss of executives in this way can, for obvious reasons, hurt the business and derail a possible sale. Employee equity incentives and employment contracts can lessen this risk by incentivizing executives and key employees to remain with the company until the business can be sold and potentially make it easier for the buyer to keep key employees after the sale if it so desires.
There are a variety of equity incentives available to encourage key employees to remain with a business until its sale, including restricted stock grants and stock options for corporations, profits interests for limited liability companies and partnerships, and change of control bonuses in all cases. Many of these equity incentives – including restricted stock grants, stock options, and profits interests – typically vest before or upon a sale of a business, potentially resulting in a significant payday to key employees. Cash from a particularly lucrative sale may even allow key employees to retire early.
Many buyers, however, will want the key employees to remain with the business after the sale in order to ensure a stable transition and continued growth and profitability. A business contemplating a sale accordingly needs to provide sufficient economic incentives for its key employees to work diligently towards a sale without tempting them to retire or seek other opportunities after closing.
Businesses can structure employment contracts in ways that give key employees strong economic incentives to stay with the business after closing. For example, the agreement can require that some portion of the cash that a key employee receives at closing be placed in an escrow account and released only after the passage of some period of time – like two (2) years – provided that the key employee continues to work for the business until that time. Alternatively, an employment contract may require that a key employee receiving cash to use some portion of it to purchase equity in the post-closing business, giving the key employee a stake in the business’s continued growth and profitability.
This post was written by Matthew D’Ascenzo