In many cases, when a candidate is recruited, they are being offered a new hire grant of equity awards and (possibly) subsequent “refresh” grants. Depending on the company, this can be a significant component of the employee’s total compensation and may be the most important piece to get the candidate to accept the offer.
So, naturally, companies tend to include information about the equity awards in the offer letter provided to the candidate, together with information about the employment terms (e.g., base pay, bonus eligibility, etc.).
If the candidate is to be employed by an entity outside the United States that is different/separate from the company that will be granting the equity awards (typically the parent company), we strongly recommend changing this practice. In a nutshell, we would advise to delete any references to the equity awards from the offer letter (as well as from any employment agreement that may be provided later or at the same time) and to communicate information regarding the equity awards in a separate equity award side letter that is provided by the granting company.
Why a Separate Equity Award Side Letter?
The main reason for separating information about equity awards from the employment offer letter is to make the case that the equity awards are NOT part of the employment relationship and not part of the remuneration paid by the employer. Instead, we want to argue that the awards are a separate discretionary incentive provided by the (foreign) parent company.
If the equity awards are viewed as part of the employment relationship, this can increase the risk of various claims that employees may raise related to the awards, as follows:
- Entitlement/vested rights claims: Employees may claim to be entitled to regularly receive awards in the future.
- Inclusion of award benefits in severance calculation: Terminated employees may claim that value of equity awards has to be factored into calculation of statutory severance payments.
- Inability to forfeit unvested awards: Terminated employees may claim to be entitled to all or portion of unvested awards (that normally forfeit at termination) on the basis that already earned such shares or were incorrectly deprived of such shares due to wrongful termination.
- Discrimination claims: Employees who did not receive awards may claim they are entitled to awards, or to a greater award, or to more favorable treatment under an award.
- Co-employment claims: In a dispute, employees may attempt to bring in the parent company as a defendant on the basis that the awards established a de-facto employment relationship with the parent.
It is very difficult to quantify whether such claims may actually be successful – this is usually highly fact-specific and will also depend on the country in which the employee is based.
Further, not mentioning the equity awards in the employment offer letter/agreement is only one piece of the puzzle to mitigate the risk. Companies must more broadly take care not to mention equity awards in any local employment documents, such as employee handbooks, policies, etc. and to have all communication regarding awards come from the parent company. It is also recommended to include strong language in award agreements requiring the participant to acknowledge the discretionary nature of the awards.
Another reason for using a separate side letter coming from the parent company can be data privacy compliance. In particular, if a company intends to rely on the grantee’s consent to collect, process and transfer personal data in connection with the administration of the equity awards, the side letter presents a great opportunity to obtain such consent in a timely fashion. If companies obtain such consent through the inclusion of consent language in the award agreement (that is to be accepted by the grantee), the consent typically is obtained too late because, at this stage, personal data has already been collected and transferred to the parent company and/or the third-party broker engaged to assist with the administration of the awards. Of course, the consent language should be carefully vetted to ensure it is in compliance with applicable data privacy laws (such as the EU GDPR).
How to Administer Separate Equity Awards Side Letters?
As mentioned, the letter should be provided by the parent company as the grantor of the awards, separate from the employment offer letter (which should come from the employing entity).
If it is administratively too difficult for the parent company to send a separate equity award side letter for each candidate, companies could consider providing local entities with a template letter that they can fill in but which would still be provided separately from the employment offer letter. In particular, the equity award side letter should be on the letterhead of the parent company, while the employment offer letter is on the letterhead of the employing entity.
As also mentioned, any information regarding the awards should be deleted from the employment offer letters (as well as any other employment-related documents).
And finally, recruiters and hiring managers should be trained to discuss the equity awards as being separate from the employment relationship, and emphasize that these are granted by the parent company, at its discretion.
Conclusion
Although it may seem counter-intuitive not to present a candidate with information regarding equity awards in the employment offer letter, using a separate equity award side letter to communicate this information is best practice and will help companies mitigate the risk of employee claims related to equity awards as well as potentially assist with data privacy compliance. Please contact us to receive a template equity award side letter that can be used to communicate the awards.
And to implement other best practices related to the grant of global equity awards, please check out our article on the Ten Best Practices for Global Equity Awards.
