Brad Feld

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Letter of Intent: Employee Matters

Apr 19, 2006
Category Term Sheet

As my body recovers from my recent marathon, my brain turns back to Letters of Intent. Jason and I left you hanging for a while in our Letter of Intent series – we plan to tromp to the finish line in the next few weeks.

In an effort to mix metaphors, while Jack Bauer tries to always look out for other people at CTU (except for say – in Ryan Chappelle’s case), it’s not always true that management is playing the same role in an acquisition.  In public company acquisitions, you often hear about egregious cases of senior management looking out for themselves (and their board members helping them line their pockets) at the expense of shareholders. This can also happen in acquisitions of private companies, where the buyer knows he needs the senior executives to stick around and is willing to pay something extra for it.  Of course, the opposite can happen as well, where the consideration in an acquisition is slim and the investors try to grab all the nickels for themselves, leaving management with little to nothing.

Since management’s (and the board’s) responsibility is to all shareholders, it’s important for management (and the board) to have the proper perspective on their individual circumstances in the context of the specific deal that is occurring.  Whenever I’m on the board of a company that is a seller, I prefer to defer the detailed discussion about individual compensation until after the LOI is signed and the management of the buyer and the seller have time to do diligence on each other, build a working relationship, and understand logical roles. Spending too much time up front negotiating management packages often results in a lot of very early deal fatigue, typically makes buyers uncomfortable with the motivation of the management team for the seller, and can often create a huge wedge between management and the other shareholders on the sellers side. We aren’t suggesting that management and employees “should not be taken care of appropriately” in a transaction – rather – there won’t be an opportunity to take care of folks appropriately if you don’t actually get to the transaction, and this is an area that often causes a lot of unnecessary stress if addressed too early in the negotiation.

While we don’t recommend negotiating the employment agreements too early in the process, we also don’t recommend leaving them to the very end of the process.  Many buyers do this so they can exert as much pressure as possible on the key employees of the seller – i.e. – everyone is ready to get the deal done, the only thing hanging it up is the employment agreements.  Ironically, many sellers view the situation exactly the opposite way – i.e. now that the deal is basically done, we can ask for a bunch of extra stuff from the buyer.  Neither of these positions is very effective – both usually result in unnecessary tension at the end of the deal process and occasionally create a real rift between buyer and seller post transaction.

As with most things in a negotiation (and in life), balance is important.  When it comes to employee matters, there’s nothing wrong with a solid negotiation – just make sure that it happens in the context of a deal, or you’ll likely never actually get the deal done.