CEO agreement includes provisions covering unique roles and responsibilities along with compensation benefits. It is common for startups and early stage ventures to execute only a verbal contract for their CEOs. Many entrepreneurs argue that verbal contracts are acceptable, but we strongly disagree, and strongly recommend that you must have a written contract.
CEO agreements or CEO contracts are important for running a smooth business. Companies opt for legally binding agreements with the CEO for following reasons:
To ensure that the CEO and the company agree on all the benefits and the compensation the CEO should receive, and that the term is at-will.
To describe the duties of the CEO by enclosing a separate job description
To enlist all the business expenses that the CEO will or will not have to incur.
To ensure that the annual performance review of the CEO is in writing.
To impose restrictions to safeguard the company through clauses like non-compete, confidentiality, etc.
The most important clauses of a CEO employment contract are as follows:
A lock-in period of 3 years is most common as general practice, but longer or shorter terms are possible. Contracts often will have an option to renew the contract on mutual agreement between the company and the CEO.
A detailed description of the role may be annexed with the employment agreement.
A detailed breakup of the base pay with special allowances such as travel, medical, health insurance, etc. The benefits of HRA and PF shall all be included in this clause. This clause should also specify the one-time signing bonus, if any, paid to the CEO. This clause can also incorporate the incentives and bonus details and how the CEO’s performance will be assessed, or you can have separate clauses for the same.
This indicates what the level or range of incentive will be, how the incentive or bonus will work, and how the incentive or the bonus amount will be determined if there is a range.
This clause indicates the amount to be paid if the CEO stays for a certain term, either as a single amount paid at the end of the contract or as a retention bonus with an amount paid out at stages over the term of the contract.
Supplemental Executive Retirement Plan (SERP) allows the company to provide the CEO with additional retirement benefits beyond those provided by qualified plans.
This clause forbids the CEO from engaging in private consulting projects that may compete with the projects of the organization. Upon the CEO’s departure, this agreement may also set restrictions on future business transactions as well as restrictions on whom the CEO may hire away from the organization.
This clause is one of the most important clauses in any agreement. It ensures that any confidential and private information that is not to be disclosed or privileged to the organization will not be made publicly available.
This clause states that the company is the owner of all the intellectual property that the CEO may come in contact with during his/her term of employment.
A termination clause stipulates the conditions in which the company or the CEO may terminate the agreement. This clause may also have the details of severance packages.
An arbitration clause is included in agreements so that you or the CEO can settle any disputes that may arise within the purview of this agreement outside of court through arbitrators.
This clause lays down the territorial limit by whose laws this agreement will be governed.
CEO’s are Level “C” employees who are often offered Equity with Employment. Employee equity is often offered via an Employee Stock Ownership Plan (ESOP). With equity-based compensation, the employee gets the shares of the company either instead of or in addition to cash compensation. As a result, the employee owns part of the company.
The employee can be given:
Common Stock – This stock pays dividends (a percentage of the profits) when the company makes money.
Preferred Stock – The holders of this type of stock get paid dividends before the holders of common stock.
With a stock option, the employee isn’t given stock completely. Instead, the employee has the chance to buy shares later, but at a previously set price. Buying the stock is called “exercising the option”. For example, a company might offer an employee the ability to buy 10 shares of stock at $10/share in 5 years. After the 5 years pass, the employee can buy the 10 shares for $100 regardless of the current market price of the stock. If the current market value of the 10 shares of stock is now $18 per share or $180 total, the employee can sell those 10 shares for $180 and reap a profit of $80. Nevertheless, if the stock is worth only $9 per share, then the 10 shares are worth only $90 and the options are said to be “underwater”.
Stock options usually vest over time and this is known as “vesting period”. For example, you might have 100 shares vesting over 4 years, with 25 shares available for you to buy by the end of the 1st year, 50 by the end of the 2nd year, etc.).
Once an employee has an ownership interest in the company, it’s presumed that the employee will work harder and that the company will flourish as a result. Equity-based compensation can, therefore, be a win-win for the company and the CEO since everyone benefits from the company’s success.
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