As a business owner, mergers and acquisitions present an exciting opportunity to realize liquidity to your hard work in building a company. Likewise, a growing company may also use a merger or acquisition to stimulate growth and expansion. In either case and invariably, the company being sold (i.e., the “target company”) has certain key personnel that are essential to the target company’s continued success. A transaction like a sale of the target company can often be an anxiety inducing experience for the target company’s employees. Often, the employees don’t know what’s going on but have suspicions. The uncertainty can cause instability for those key employees.
Obviously, one of the biggest risks in buying a company is whether or not the new owners can successfully transition the ownership. Often, a smooth and successful transition requires key employees to stick around to help with the transition (and possibly beyond). Thus, properly incentivizing these key employees to stay through the transition can be crucial. Here are a few mechanisms that can help with that.
When it is absolutely critical that certain employees stick around throughout the merger and acquisition period, it is sometimes necessary to make them a direct bonus offer. This often comes in the form of an agreement that says that the employee will get a set amount of money if they stay with the company for a set amount of time. This stay bonus can be paid by either the buying or the selling company and will help to minimize the possibility that the employee will leave. Often, these bonuses are offered by the seller prior to the transaction (and even prior to the sale process) as a way to help make their company more sale-able.
The basic terms a “stay” bonus might be something like this:
The target company agrees to pay Rockstar Employee a total of [$ _________][X% of the net proceeds of a Change in Control transaction] (the “Bonus”). [Y]% of the Bonus will be paid promptly after the closing of the Change in Control Transaction and [Z]% will be paid [W] months after the closing date of the Change in Control Transaction.
There are obviously more detailed terms and protections that the target company should build into this agreement. But, this is the main deal point of the agreement.
Incentives for Beyond the Transition
If the long-term employment of particular employees is critical for the buyer, then that buyer is going to have to keep that employee incentivized. They can do that through a mix of the traditional “tool belt” (i.e., salary, company benefits, credit for prior service, perks, etc.). The acquirer or acquiring company may also be in a position to offer additional incentives in the forms of stock options, profits interests, phantom stock, stock appreciation rights, etc.
These days, buyers must also be cognizant of the target company’s culture and how it blends with their own. Nowadays, people work for companies for many other reasons other than the salary and benefits. So, buyers who really need those employees are likely going to have to tap into those culture drivers to keep those employees that care most about culture.
Crafting the Legal Contracts
When making any type of offer to key employees, you will need to have it written up to ensure both parties know what they are getting. Having a properly written contract will make it so these incentives are enforceable in the manner in which they were intended.
Contact Doida Law Group to learn about our fixed-fee approach to projects and to schedule a consultation about all your merger and acquisition-related needs.