Employee Retention Agreement Essay

An Employee Retention Agreement is a legal contract entered into by an employer and a key employee whose services the company desires to retain. When employees know that their company might be acquired, they understand that their employment security may be in danger. In these situations, companies who want to ensure these employees' continuing loyalty and commitment sometimes feel that it is in the best interests of the company and its stockholders to provide the employee with an incentive to continue his or her employment and to motivate the employee to maximize the value of the company upon a possible change of control.

Employee Retention Agreements generally provide a bonus structure and severance model for key employees, and may include significant severance pay, acceleration of stock options, or other benefits the company deems necessary to retain the employee. Drafters of these agreements should also pay careful attention to include, if applicable, the following provisions:

1. TERM OF AGREEMENT. The agreement should likely terminate upon the earlier of: (a) the termination of Employee's employment for any reason prior to a change of control, or (b) the date that all obligations of the parties hereto with respect to this Agreement have been satisfied. This provision should be drafted accordingly.

SEPARATION BENEFITS UPON INVOLUNTARY TERMINATION FOLLOWING CHANGE OF CONTROL. The employee may want to include a provision that states that within one year of the effective date of a change of control, the employee's employment with the Company is terminated (an "Involuntary Termination") by the Company or the successor corporation without cause or, by the Employee as the result of a constructive termination by the Company or the successor corporation, then, the vesting of Employee's then unvested shares of the Company's common stock shall automatically be accelerated so as to become vested as of the effective date of the involuntary termination or constructive