By Robert A. Adelson, Esq.

EQUITY COMPENSATION ARRANGEMENTS FOR HIGH TECH CONSULTANTS

EXAMPLE  (Hypothetical and Fictitious)

SuperpowerSoft Co. 

                                                                        Employees: 5 (3 being part-time)

                                                Shares             Sales: -0-; Developmental State

EdisonPres., CEO                  40%                 Assets: 250k   Liabilities:      10k

Kwertzberg, VP Operations   40                    Cash:   50        A/P      10

Other Part-Time Employees  2                      Equipment      50

Investor Stocks (FFF)             10                    Technology     150      Sh/h Equity: 240k

Mansey, VP Mrktg (if vested) 8                    P/L: (30k)

Part-Time Consulting for High Tech Start-Up Company

            Tim Mansey was a senior officer at software giant, Zen Development Corp. inCambridgeuntil Zen’s acquisition by an even larger out of state computer corporation.

After leaving Zen, Mansey decided that, rather than job search for a full-time position, he would seek job assignments from different companies, selling his engineering, marketing skills from 15 years at Zen and other known companies on Mansey’s resume.            

Over the last year, Mansey developed a consulting business for software companies under the name, “CEO Strategies”. He has an ongoing 1-day a week assignment and completed job assignments with large and smaller companies, including assistance in marketing , product design, technology validation and some software development work.  One company has asked Mansey to join its board of directors.

Most clients have paid on time, and with one or two exceptions, the work of CEO Strategies has been very well received.  Originally, Mansey’s assignments came from colleagues at established firms, but now he also approaches start-up and emerging companies, even though most cannot pay Tim’s daily consulting fees.

Recently, Tim discussed a part-time spot in one such startup: SuperpowerSoft Co., newly founded by Tom Edison who invented the SSC proprietary technology, and Mitch Kwertzburg, who was with Tom at DEC and with family, etc. contributed the cash capital.

Formed 6 months ago, SSC now has 3 other techies part-time, leases space inBurlington, and has a product nearing completion.  SSc still has funds from investment by Mitch, family, friends, etc., but no one takes a salary.  So, Tom and Mitch thought it time to recruit a “sales guy” to help market the product.  Enter…Time and CEO Strategies.

Tim believes SSC has a breakthrough technology with ready markets.  With his industry background, Tim believes that he can attract licensing & strategic alliance partners (he sees ChyBase as likely 1^st match) to speed SSC market entry but Tim needs authority.

Tom and Mitch like Tim, but don’t want him taking over and are not sure how much stock to give him.  They have several questions on compensation, terms and pitfalls. 

IS EQUITY FOR PAY A GOOD DEAL?

OPPORTUNITIES AND… PITFALLS

QUESTIONS OF THE CONSULTANT:

• When does taking equity as your pay make the most sense?
• What are the types of equity? Stock options

Or other arrangements a client can offer you?

• How do we value the stock or options you get?
• What taxes does the Consultant pay?
• How do you avoid dilution
• What other structuring issues should you ask about to protect your equity stake?

QUESTIONS OF THE COMPANY:

• When does offering equity make sense to a Company?
• Can this equity be paid based on performance? Or loyalty? Can we measure performance?  How much stock to give?
• What if things don’t work out: Can we get the stock back? What if Consultant dies? Quits? What if we sell the Company?
• Is stock (or options) paid deductible by the Company?
• Will giving stock now hurt us later? In seeking financing? In morale with current staff? In recruiting new talent?

Equity Compensation for Services

1. Forms of Equity

• Common Stock: voting or non-voting
• Preferred Stock:

Preferences in liquidation

Dividends, cumulative or not, management

• Warrants or Options
• Convertible Debt
• Phantom Stock/ other deferred comp

1. Vesting Schedule

• Acceleration on change in control
• Buy-back rights on Termination

1. Stock Purchase Agreement

• Investment warranties by purchaser
• Company disclosure, business plan
• Anti-dilution protections, pre-emptive rights
• Company covenants, reports
• Registration rights
• Cash-out Rights

1. Stock Option Agreement

• Grant Date & Option Period
• Exercise Price and Method
• Company Plan, restrictions if qualified
• Enhanced flexibility, if non-qualified.

Valuation of Company Equity

1. Current (Tax) Fair Market Value

Rev. Rul 59-60: Assets,Indus, History, Comps.

Discounts for Illiquidity, blockage, minority

1. Forward (Investor) Value from Business Plan

a.      Product, Technology, Uniqueness, Edge

b.      Market, Competitive Strategy, Penetration

c.      Management Team, motivation, track record

d.      Financial forecast, underlying assumptions

e.      Capital Sought, financing stage, funds use

1. Blend Valuation with our without Services

- Entrepreneur’s investment, upside potential

-Present value of future using 35% ROI

Stockholder Agreements related to Equity

1.      Goals:       stabilize management, ownership, provide liquidity, valuation of shares

2.      Means: share transfer restrictions, voting agreements

3.      Involuntary transfers

4.      Voluntary transfers – 1^st Refusal toCo., Shhs

5.      Control Change Co-Sale: Drag & Tag-along

Taxation of Equity (in lieu of cash compensation)

1.      Stock Issued – Purchase Plan

• Not restrictive; open to Consultants
• Tax Paid when no subst’l risk of forefeiture & stock has readily ascertainable FMV
• §83 Ordinary Income Tax
• §83(b) Election can accelerate the Tax

2.      Stock Option – ISO (Incentive Stock Option)

• Restrictive Plan – FMV, limits on amount, exercise
• No Tax on Exercise; Capital gain on sale
• Limited to current company employees

3.      Stock Option – Non-Qualified Plan

• Restrictive Plan NOT IRS Required

Tax Paid on Exercise of option

• Capital gain on Later Apprec. Paid onSale
• Not limited to current employees

4.      Equity Based Compensation Plans

• Phantom Stock; Stock Apprec. Rights (SAR)
• Tied to co. growth, no equity but payment rates
• Not restrictive; open to Consultants
• Taxed as Paid; All §83 Ordinary Income Tax

Payment by Promissory Note

1.      Installment payments – fixed time-table

2.      Debt obligations – promissory note

• Unconditional promise to pay sums owed
• Interest on outstanding debt
• Warrants in client stock – Equity “kicker”
• Defining “events default” & consequences
• Collection of costs & Attorneys fees
• Collateral security for debt
• Perfection of security interests

3.      Installment taxation on payments received

4.      Benefits of note for enforcement

ABOUT THE SPEAKERANDPRESENTATION

            These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, MA 02110, (617) 951-9980, fax: (617) 951-0048, e-mail: radelson@engelschultz.com

            Mr. Adelson is a graduate of BostonUniversity, Phi Beta Kappa, and Northwestern University Law School in Chicago where he was a member of Law Review. He has an LL.M. degree in Taxation fromNew YorkUniversity, and is a member of theMassachusetts,New York and U.S. Tax Court Bars.  He began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2004.

            Mr. Adelson is specialized in corporate, taxation, business and technology transactions.  In those areas, he frequently represents (1) small companies with their various business needs, including shareholder and employee issues, financing, commercial contracts, intellectual property, joint ventures, mergers and acquisitions, succession planning (2) senior executives, in negotiations over severance, employment, relocation, stock options, compensation and stockholder arrangements, and  (3) consultants – in liability protection, intellectual property protection, trade identification, vendor, client and subcontractor arrangements.

            Mr. Adelson’s firm, Engel & Schultz, LLP, is a small but broad service law firm of 6 attorneys inBoston’s Financial District.  The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in family, probate, real estate and litigation matters. 

            Mr. Adelson is a frequent speaker at business forums and Chairman of IEEE BostonEntrepreneurs Network www.boston-enet.org .  Further information on Mr. Adelson’s background and his past published articles is available at his law firm website.  To view many of Mr. Adelson’s past articles, see http://www.engelschultz.com/index.php/category/publications/  or http://robadelson.wordpress.com/

The speaker thanks Ron Goodstein and Tom Vaughan for the invitation to speak for IEEE Consultants’ Network on the topic of “Getting Paid in Stock, Options or Promissory Notes:  Negotiating the terms of on-Cash payment for Consulting Services” at the Emerging Enterprise Center, Waltham, Massachusetts on May 26, 2010.   

The example on page 1 of these Materials are hypothetical and fictitious although the questions on page 2 are drawn from actual client questions.  The purpose of the example is solely to illustrate contracts issues, strategy and planning concepts and stimulate meeting discussion.  The remainder of these materials are to offer rough outlines of broad areas of major contracting situations for technology based business. It is hoped that these materials will inform discussion and be useful reminder of topics covered for the attendees.  These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

©2010 ByRobert A. Adelson

By Robert A. Adelson

As a consultant, entrepreneur, client or professional, you are often dealing with contracts, your own and others.  What should you be looking for in your contracts?  What makes a good contract? 

What terms to include in consulting agreements?  Contract and tax issues structuring compensations?  Should I hire a subcontractor?  How to structure the Relationship?  What protections do I need?  What terms to include in software development contracts?  How to structure milestones and intellectual property rights?  How to negotiate VAR and distribution agreement?  Terms to include in licensing products and technology? 

Making Good Contracts

Contracts should be clear and complete to reduce uncertainty, and cut legal costs to enforce.

The contract should cover:

• Mission – Defining your mission and covering the scope of the contract
• Conditions – Current and relevant variables, contingencies to performance
• Reliance – Setting out warranties and representations that each side relies upon. 
• Consideration – Stating what each part contributes regardless of form it takes
• Mutuality – requiring each party to contract to “ante up”
• Commitment – Timing contributions to vulnerability to non-performance is reduced.

Service and Consulting Agreements 

Service contracts should set out scope of services, reports, and deliverables in both general terms and with an attachment specific to the job assignment.

There should also be provisions on contractor’s independence and control to enhance likelihood of treatment as an independent contractor (though ever harder under Massachusetts law).  Contracts should also set out agreed restrictive covenants – confidentiality, assignment of inventions, non-solicitation, no-raiding and non-competes as negotiated and agreed. 

Compensation Arrangements 

Contracts need to cover manner of payment whether lump sum by job and assignment, or by time and materials.  Where the contract is fixed price, care needs to be taken in conditions for the job with arrangements for adjustment to payment based on change orders in project scope or conditions. 

The contractor needs to protect himself or herself to give greater assurance of payment especially in hard times when money is short.  An advance should be paid, with collection terms for late payment.  If cash is short, rather than lose the work or cut the price too much, part of payment might be made by promissory note or in equity of the purchaser. 

Debt or equity terms should be negotiated and spelled out.  Immediate issuance of stock with appropriate IRC §83(b) elections can avoid costly tax “surprises” down the road if a company does succeed and the stock becomes more valuable.

Subcontractor Arrangements

Consultants hate to turn away business and if your consulting has reached that level of success, hiring qualified subcontractors to help with work overflow, can be a win-win-win.  

Subcontracting can help you retain satisfied clients you might have lost because you lacked capacity to handle the work. It allows you to leverage your marketing success.  It can provide sorely needed work to colleagues who should value you as a source of business.

But here too, in subcontracting a proper contract is needed to assure no poaching of your clients by your subcontractor, clarifying work delivery and compensation terms, including risk on non-payment by your client. 

Software & Product Development

These contracts should include accepted specifications, terms of acceptance, milestones for completion and payment. The developer needs to be paid for his work and owner or user needs assurance that at each stage he is receiving a value in case at some stage there is a disagreement or dissatisfaction and termination occurs. 

These contracts often require a detailed parsing of intellectual property ownership rights.  The developer needs to ownership of his or her software tools.  The client his full rights in the product being developed if paid for. 

Termination rights, source code escrows, warranties, maintenance and upgrades are also important for the complete agreement.

Technology- Based Licensing and Distribution

Where software, medical device or technology-based products are developed, the developer, consultant or entrepreneur often seeks to use a third party to outsource sale and distribution.  Thus, the product, device or software will be licensed with arrangements for distribution with a value added reseller, dealers or other appropriate sales and distribution channels. 

Licensing has its own set of issues including scope of license, fields and applications licensed, territory covered.  The license also needs to state and the parties often negotiate whether the license is exclusive and length of term or irrevocable.

The License should cover other issues as well:  quality assurance, use of trademarks, other IP rights, promotion obligations, quotas and customer service.  The license should also then the compensation issues – royalties to be paid up front, over time, based on sales. 

Care in Contracts to protect your business

The contracts discussed are important in early stage business.  They need to be prepared carefully so that the entrepreneur or consultant has a clear understanding of her or her contractual responsibilities.  The contracts also need to provide a degree of protection to the entrepreneur and consultant so that unnecessary risks and liabilities are avoided.  Without care, bad contracts can sink a business.

Robert A. Adelson, is a corporate, tax, contracts and intellectual property attorney and partner at the firm, Engel & Schultz LLP, Boston, MA You can contact Mr. Adelson at radelson@engelschultz.com

(c) 2011 Robert A. Adelson

• What it takes to be an entrepreneur

• Steps to launch a product business             

 • Steps to launch a service business

 • Legal Aspects of startup companies

IEEE Entrepreneurs’ Network,  Waltham, MA – September 6, 2011

By Robert A. Adelson, Esq.

Entrepreneurial Profile: Do you have what it takes?

1. Introduction

          • High Rate of Startup Failures

          • Hard to Succeed

          • Don’t start for wrong reasons

2. Passion for your business

          • Commitment, sacrifice, confidence

          • Optimism, reasons why it will work

          • Resilience

3. Knowledge of your market and place

          • What is really unique about your business

• Need: Selling morphine, not vitamins

• Business Model

• Where are you playing: dominance over your market

• Recurrent Revenue-fixed cost leverage

• Competitive advantage

4. Working with others, Facing Change

• Sharing, fairness, team building

• Adapt and change-learn and grow from your mistakes

• Scaling the business-including when to fire yourself

5. Putting yourself out there, on the line

          • Giving of yourself

          • Networking

          • Relationship building, nurturing

Launching a Successful Product Business

1. What is a Successful Business

          • Producing good return to you and your stockholders

          • More money coming in than you are putting out

2. Have a Plan: How will you create value for others

          • Find a “pain” in the market – providing a solution

          • You can’t create demand-  you want to fill supply

          • Establish your brand based on filling a compelling need

3. Know your customer, know your market

          • Start local and build – small, fast, cheap

          • Keep testing-figure out what works and doesn’t

          • Keep your database, access it

          • Develop a sellable model/market and test product

4. Build a company

          • LLC or Corporation- entity, limited liability, credibility

          • Stock for others

5. Build a team

          • Equity and fairness; share success

          • Convince others to join you – seek good fit

• Build a Board of Advisors or Directors – Key resource for you

6. Build a prototype, sell something

          • It doesn’t have to be perfect

          • Selling-feedback and gets $ coming in

          • Establish further proof points of viability, credibility

7. Develop and protect your IP

          • What you can protect and what you can’t

          • Strategize IP protection- IP assets

8. Bootstrapping and Commercial Contracts

Launching a Service or Consulting Business

1. Your Market: Research and Determination

          • Self Skill assessment (“looking in mirror”)

• Who are your customers? Finding them…

• Listening to customers/match skills to need

2. Selling Service and Selling Yourself

          • Selling Payback you can deliver customer

• Promotions – articles, talks, advertising …

• Lead Generation, building your network

3. Building a Trade Name and Identification

          • Name, Logo for Recognition / Distinction

          • State, Federal trademarks as bus. Assets

4. Compensation, Pricing & Collection Planning

     • Fees- By Rate, Commission, Lump sum

     • Payment Installments – Periodic, Milestone

     • Security – deposit, Security Interest, Penalty                                

     • Reimbursement or Payment of Expenses

     • Currency of Payment – Cash, Stock, Other

5. Production, Costs and Delivery of Services

     • Quality Control; Repeat Bus, best marketing

     • Cost Control, start small

6. Sales and Limitations on liability to customers

     • Sales Terms to limit commitment, Forms Battle

     • Upfront Liability Bar: Corp, LLC in operation

     • Backend Liability protection via insurance

7. Staff, Subcontracting & Handling Overflow

     • Staff & contractors to expand capacity, reach

     • Subcontracting work Terms & Non-poaching

Legal Aspects of Launching a Startup Company

1.  Choice  and Formation of Business Entity

          • Business Merits of Corporation (S or C), LLC, LLP

          • State of Formation, Qualification of foreign entity

2.  Taxation of Business

          • Double v. Single Level taxation; payroll taxes

          • Pass Through of losses / income;  1202 stock opportunity

          • Complexity of capital structure

3.  Intellectual Property and Proprietary Protection

          • Patents  – Provisional and full utility patent

          • Trademarks – ITU and use based filings

          • Copyrights and Trade Secrets

          • Assignment of rights and NDAs

4.  People – Contracts among Service providers and Owners

          • Employees / Contractors, consultants, “Virtual Companies”

          • Board of Advisors / Board of Directors

          • Equity Participation – Options, Restricted, Phantom stock

          • Shareholder Agreements – Share transfer, management, succession

5. Products and Markets

          • Production Arrangements / Supply contracts

          • Sales / Distribution – Dealer contracts, sales terms

• Product and IP licensing

6. Money:  Raising Capital and Securities Law Compliance

          • Bootstrapping, family and government grants

          • Angel and Venture Capital Finance / Securities law compliance

          • Loans, collateral, guarantees and debt finance

7. More:  Other important legal aspects of your business

          • Home;  Office / facility and store leases

• Zoning and environment regulations

• Regulatory compliance for your products

          • Business insurance

ABOUT THE SPEAKER AND PRESENTATION

 These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, MA 02110, (617) 951-9980.        Fax (617) 951-0048. E-mail:radelson@engelschultz.com  Website:  www.executiveemploymentattorney.com  Blog:  http://robadelson.wordpress.com/

 Mr. Adelson is a graduate of Boston University, Phi Beta Kappa and Northwestern University Law School in Chicago where he was a member of  Law Review.  He also has an LL.M. degree in Taxation from New York University and is a member of the Massachusetts, New York and US Tax Court Bars.

 Robert Adelson began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2004.  Mr. Adelson is specialized in corporate, taxation, contracting, employment and intellectual property law.  In those areas, he frequently represents entrepreneurs, startup and smaller companies. He also represents executives and consultants in employment, contracting, liability and severance matters, and family business with phantom stock and succession planning.

Mr. Adelson’s law firm, Engel & Schultz, LLP, is a small but broad service law firm of 5 attorneys in Boston.  The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in litigation, real estate, family and probate matters. 

Mr. Adelson is a frequent speaker at business forums and Chairman of IEEE Boston Entrepreneurs’ Network www.boston-enet.org and a Board member at 128 Innovation capital Group www.128icg.org .  Further information on Mr. Adelson’s background and his past published articles is available at the Engel & Schultz LLP  law firm website.  To view many of Mr. Adelson’s past articles, see http://www.engelschultz.com/index.php/category/publications/ 

Mr. Adelson is organizer and moderator of  tonight’s presentation “Transforming Your Ideas into a Successful Company” for IEEE Boston Entrepreneurs’ Network in Waltham, MA and is also the fourth speaker tonight, one of two speakers taking the place of  the original 3^rd speaker Bart Riley, co-Founder and CTO of A123 Systems who was called to Michigan and cannot speak tonight, September 6, 2011.

The purpose of these materials is to offer an outlines on the subject matter of the Entrepreneurship for those considering forming or joining a startup company or advising others on that prospect. Thus, it is hoped these materials will be informative to those in attendance.  These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

 (c) 2011 Robert A. Adelson.  All rights reserved.

• 1.         When is the right time to negotiate an executive employment agreement?

The right time to negotiate your executive employment agreement is A) when you are making a commitment, B) when you have something at stake, and C) when you want to confirm the terms that were offered.  This can occur when you are relocating and will have to uproot a home and family. This can occur when you are giving up a secure position.  It can occur if you are asked to give up clients or a practice built up over years.  It can occur if you are asked to give up other deals you might take.  Those situations call for negotiating fixed terms and getting a reciprocal commitment from the employer.

• 2.         When do I hire an attorney?  who negotiates?   how do we proceed?

Early in process is the best time. Certainly when you are discussing terms and certainly by the time a term sheet is offered you want have engaged your attorney.  A big part of what you are hiring is the attorney’s knowledge, experience and creativity to propose terms you will want to include.  By engaging the attorney at the early stage you have the greatest chance to let the attorney make an impact for you.  Sometimes clients like to keep the attorney in the background as a sounding board and that’s fine.  Other times clients like the attorney to do the negotiations – sometimes with the term sheet and most often with the actual employment agreement.  By having the attorney negotiate it does allow for a buffer so the attorney asks the hard things and the client is in position to be the nice guy in a “good cop” / “bad cop” routine.  You want to keep relations good between client and prospective employer.

• 3.         What will legal services cost?

There is no cost for an initial telephone or internet consultation with me.  This should enable you to further determine if the services we offer meet your expectations.   There is no obligation from our initial consultation. Whether or not you hire me, your consultation will be kept confidential.  Effective client service includes an understanding about the economic terms of the lawyer/client relationship.  To avoid any misunderstanding, the fees are discussed in detail, at no charge, during the initial consultation. The exact terms of representation will be set forth in a written fee agreement we prepare at no charge to you.   That agreement will set out my hourly rate for the work and set an initial retainer or down payment toward first work to be performed for you.  Frequently, we are able to negotiate for the employer to pay all or part of our fees.  In that event you credited dollar for dollar the amount paid by the employer against your outstanding balance. 

• 4.         What if the company won’t negotiate? Will raising issues or hiring an attorney kill the job offer?

If the prospective employer won’t negotiate the term sheet or employment agreement that may be a warning to you that this may be a difficult / controlling employer that you may not want to work for.  You might still take the job but it’s a warning to you not to make too big a commitment because this might not work out.  It’s also a warning that this employer may not value you highly enough.  If an employer really wants you, they should negotiate.  The company should respect you enough to negotiate.  You on the other hand, in the course of your negotiations, vindicate their decision.  In the negotiations you (with help of your attorney) ask the right questions, seek the right things.  You show yourself to be a serious person who focuses on big ticket items – the kind of person the new employer wants on his team.  Finally, even if you don’t achieve what we seek in negotiations, the effort is not wasted.  There may come a time to revisit issues and we’ve laid the ground work.

• 5.         Can I get a signing bonus? Can I justify a large pay increase?

Yes. If you are giving up something you need to be made whole. There may be vesting stock or options or other golden handcuffs.  The new employer must offer the golden key to unlock those golden handcuffs by making you whole economically for what you sacrifice to take a new position.  At the least you are leaving or are perceived to be leaving a secure position or other offers that are on the table, a commitment in terms of signing bonus should be sought.   A large pay increase can be justified by the value you bring to the table.

• 6.         What can I do to boost my salary and take-home pay?  What changes should I be seeking in my employment agreement and compensation?  

To get more your employment agreement and compensation, here are some of the questions you should be asking about your offer sheet or employment contract:

• How do I justify a greater base salary than offered?
• How do you I structure a greater bonus?  Can I protect that bonus and assure it is paid?
• I want to avoid taxes, how do I structure compensation to avoid the tax hit and still get paid?
• Should I be receiving stock or options in the company – When does taking equity make the most sense?  How much equity should I be seeking – how do I justify seeking more than what was offered?
• What types of stock or options can the company offer? What’s the value? How is this equity taxed?
• How do you avoid dilution? What other structuring issues do I need to protect my equity stake?

• 7.         What protections should I seek for a change of control of company?  What should I look for if the company is acquired?  Can I get a retention bonus?

This can often be a difficult and tricky negotiation, especially with public companies.  But protection against change of control should be sought and careful provisions drafted that avoid the pitfalls of tax provisions aimed at parachute payments. Change of control provisions should be included in your employment contract going in and later if an acquisition is in offing and your retention is desired a further negotiation over a retention agreement should occur providing compensation and incentives for your staying on.

• 8.         Can I negotiate the NDA and non-compete? What should I be looking for there?

Non-disclosures and non-competes like the rest of your employment agreement are negotiable.  Some over-reach and can be unenforceable.  But a new employer may not want to violate the terms of a non-compete even if it is overbroad.  So, it is best to try to prune back over-reaching agreements.  The NDA should allow you to have the right to keep and use your knowledge going in and information you independently acquire.  The non-compete should now bar you from your main field of work unless you are paid not to work.

• 9.         Should I negotiate severance up front? What is fair to ask for?

Yes.   You are making a commitment to the employer.  You want a commitment back.  If the employer wants to fire you without just cause, you want them to have to buy you out of your contract.  You are compensated and given severance for loss of position, disruption and potentially harm to your career and a period when you may be out of work.   You want severance that is a fair payment for those losses you suffer.  For the employer, severance is just another cost of doing business, a cost that needs to be factored in when they determine to fire you without cause.  

If you or a colleague is an executive in need of legal representation or assistance or if you have any questions or comments on executive employment, stock, options or severance matters, you can reach Robert Adelson at the Boston office of Engel & Schultz LLP, at 617-951-9980 ext 205 or radelson@engelschultz.com

(c) 2011 Robert A. Adelson.  All rights reserved.

By Robert A. Adelson, J.D., LL.M.

A.      Business Succession Planning:  Overview
1.Why plan – Circumstances giving rise to Necessity
◦Death or Disability of owners
◦Retirement of owner or business owners
◦“Hastened” Retirement – revolt in the ranks
2.  How to plan – Alternative choices for succession

◦Internal Transfer one Generation to the next and Continuation of existing Business
◦External Sale of Business to outside third party
3.  What we seek – Goals to try to accomplish

◦Continuation / survival of the business
◦Retirement and Liquidity for the owner(s)
◦Fairness / Inheritance for non-owner family members
◦Maximization of value & favorable sale terms
◦Efficient tax planning
B.      Internal Transfer and Continuation of Business
1.Case Example – Bonanza Lumber, Inc. (Hypothetical)
2.   Planning for Continuation

◦Identification of able employees
◦Training of family members
◦Recruitment and Utilization of employees outside family
◦Provision of capital / means for success
3.  Transfer to next Generation

◦Employment agreements
◦Buy-sell agreement terms
1)   Functions

2)   Advantages

3)   Triggering Events

4)   Structure – Cross Purchase, Redemption, Hybrid

5)   Valuation

◦Life-time Stock Transfers
1)      Intrafamily Installment Sales

2)      Private Annuities

3)      Self-Canceling Installment Notes

◦Gift Transfers
1)      Gift Tax and Annual Exclusion

2)      Estate Freezes

3)      FLPs / LLCs for Discounts

4)      GRAT, CRTS, Grantor trusts

◦Non Family key employees
1)   Phantom Stock &  Employee Incentives

3)   LBO – Zenz “bootstrap” sale

4)   Sale to ESOP

4.   Providing for non-operating family members

◦Separation of real estate / non-operating assets
◦Corporate separations
◦Life insurance to equal out interests
◦Buy-sell agreement / to provide buyout terms
◦Voting and non-voting shares
◦Springing interests
5.   Further Planning for Estate Taxes

◦IRC §303 redemption to pay taxes
◦IRC §6166 to defer taxes
◦IRC §2057 Family Business deduction
C.      Desiring Internal Transfer vs. Facing External Sale
1.80% of Family Businesses do not succeed to next generation
2.  Recognition that continuation not possible

◦Inability or disinterest of next generation
◦Sale at peak price rather than fire sale
◦Owner liquidity & preservation of estate
3.  Preparing business for sale

◦Maximize value of business
◦Maintain good business records
◦Engage key consultants
◦Develop contracting process
◦Confidential information memorandum
◦Auction atmosphere
D.      External Sale of Business to Outsiders
1.Case Example – El Tiante Sports Shoe Co. (Hypothetical)
2.   Purchase and Sale of Corporation – Key Business Issues

◦Liabilities
◦Tax Issues  – Basis, Character of income, Deferral
◦Purchase Price / Earn Out
◦Warranties
◦Covenants
3.   Structure of sale

◦Sale of assets
◦Sale of stock
◦Nontaxable sale
◦Bootstrap sale / Redemption
◦Corporate separation
4.   Implementation and Documentation of Sale

◦Letter of intent
◦Due Diligence
◦Sale Agreement
◦Closing
◦Post closing obligations
5.   Estate & Family issues

◦Tax Planning for Year of Sale
◦Calibrate income and loses
◦Acceleration of deductions
E.      Conclusions – Implementing a plan
◦Beginning and continuing succession plan
◦Determining a direction / hedging bets
◦Engaging the parties concerned
◦Communication, involvement, ownership
◦Committing the plan to writing
◦Perils, pitfalls and dispute resolution
◦Updating over time
◦Working with consultants
**  This outline was for the presentation by Attorney Robert Adelson,  a 4-hour seminar course he offered for attorneys, accountants and other professionals, for continuing professional education credit, sponsored by Foundation for Continuing Education.
Questions on this presentation or the subjects covered, including any questions by

Owners or participants in family businesses or closely held businesses on buy-sell agreements, estate freezes, gifting plans, phantom stock, employment and bonus plans, and other issues concerning business succession planning or the sale of a business,

may be directed to the author and speaker at his current law firm, as follows:
Robert A. Adelson, Esq.

Engel & Schultz, LLP

265 Franklin Street, Suite 1801

Boston, MA 02110

Tel:  (617) 951-9980 ext 205

E-mail:  radelson@engelschultz.com

Waltham, Massachusetts,   May 26, 2011

By  Robert A. Adelson

1.   Consultant Duties of Loyalty to Client

• Conflicts between Clients – Taking on New Clients
• Preference in work output among your Clients
• True Test of Loyalty – The Distasteful Client

2.   Conflict of Interest – Business Opportunities

•   Disclosure of Business Opportunity
•   Disclosure of Conflict of Interest
•   Must you accept Client’s Resolution of Conflict?

3.   Consultant’s Duty  of Zeal in the Client’s Interest

• Best Advice regardless of Outcome
• Best Efforts regardless of Task/Obstacles
• Trust and Honor Client’s Final Decision-

“Customer is Always Right”

4.   Taking Stock or Options  in Clients

• Good – Extra Stake in Clients’ Success
• Bad – Loss of Independence
• Good – Key economic benefit to each side

Compensation “Thinking out of the box”

• Bad – Perception of Consultant’s 2^nd Agenda

5.   Ethics in Billing

• Stated Contract and Payment Terms
• Changes in terms – Fair Notice
• Success Fees – Prior Disclosure

Fairness – Reasonable %  For True Value Added

6.   Consultant’s Duties to Profession – To Your Own Integrity

• Illegal/Improper Client Activity – Zero tolerance
• When to Fire a Client? – Fraud
• Do Not compromise your Integrity
• If the facts not helpful – Resist Temptation to Deceit

Dig deeper. Deal with Facts you have – “Work the problem people”

7.   Client’s Duty to You, the Consultant

• Fair Dealings – “No free rides”
• Your Time is Limited and Valuable
• Security for Consultant payment
• Keeping Consultant Independence
• Cutting Your Losses – Strategic Termination – When? How?

8.   Treating Clients Right Is Good Business

• Satisfied Clients – Best Marketing and Growth Tool
• Key Asset of Your Consulting Business
• Every Client is Important

Note: This outline was prepared based on Attorney Robert Adelson’s work as an attorney since 1977, and mainly experiences with his own clients over the last twenty years, from 1991 through 2011.  To aid the discussion, Mr. Adelson uses actual client cases as illustration but all client confidentiality is maintained. In case examples, Mr. Adelson alters beyond recognition all client names, location, industries and amounts.

Background on Speaker

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, MA  02110, (617) 951-9980, ext. 205.  His direct e-mail is radelson@engelschultz.com.  His blog can be found at:  http://robadelson.wordpress.com/  His further bio and publications webpages are at -

http://www.engelschultz.com/index.php/attorneys/partners/robert-adelson/  

http://www.engelschultz.com/index.php/category/publications/  

Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, and Northwestern University law School in Chicago where he was a member of the Law Review.  He has a LL.M. degree in Taxation from New York University and is a member of the Massachusetts, New York and U.S. Tax Court Bars.   He has been an attorney at law since 1977, with major New York law firms, first Dewey Ballantine and later Weil Gotshal & Manges.  He returned home to Boston in 1985 and has been a partner in small and medium sized law firms.  He’s been a partner at his present firm since 2004.

Robert Adelson has been specialized in corporate, taxation, finance, employment, commercial and technology contracting law.  In those areas, he frequently represents startup and smaller companies in software, computer systems, multimedia, medical device, biotech and other technology-based fields.  He also represents executives and independent consultants in those fields in executive compensation and stockholder arrangements, in incorporation and liability protections, trademarks and intellectual property protections, and in vendor, client and subcontractor contracting arrangements.

            Mr. Adelson’s firm, Engel & Schultz, LLP is a small but broad service law firm of five attorneys based in Boston’s Financial District.  The firm offers depth, complementing Mr. Adelson in business and tax law matters, and other seasoned attorneys in employee benefits, estate planning and probate, real estate and commercial leasing, employment and intellectual property litigation and general business and commercial litigation matters.  In each case, the firm prides itself on prompt and timely delivery of a legal product of the highest quality at competitive small firm rates.

            As speaker, Mr. Adelson wishes to thank Ron Goodstein the programs coordinator of the Boston Section of IEEE Consultants Network, Chairman Joe Sanroma, and former Chairman Tom Vaughan for the invitation to speak in the discussion of the topic “Ethics and the Consultant:  Facing ethical issues with clients, billing and business opportunities in your consulting practice ”, at the IEEE CNET’s monthly meeting in Waltham, Massachusetts, on May 26, 2011.