Employment Agreement Review

Executive employment agreements drive both deal cost and retention risk. At Mage, we help you systematically extract golden parachutes, 280G implications, equity acceleration triggers, and non-compete provisions so you have a complete picture before closing.

Why We Focus on Employment Agreements

Executive employment agreements determine both the cost (immediate payouts) and the retention risk (will key people stay?) of a deal. We help you quantify these liabilities and identify potential issues before they become closing surprises.

Key Questions: What triggers the payment? How much will it cost? Will executives stay post-closing?

Golden Parachutes & CIC Payments

Definition of "Change of Control"

First, verify the definition matches the actual transaction structure:

Does it cover a sale of assets? A merger where target isn't the survivor? Board composition changes?

Trap: "Narrow" definitions that fail to trigger benefits even when the company is effectively sold, or "broad" definitions that trigger payouts for minor restructurings.

Standard Payout Formulas

Level	Typical Multiplier	Components
CEO / CFO	2x - 3x	Base Salary + Target Bonus
SVP / VP	1x - 1.5x	Base Salary + Target Bonus
Directors	0.5x - 1x	Base Salary only

Check: Is bonus based on "target" or "average of last 3 years"? Target is more favorable to executives.

Section 280G Tax Implications

The 280G Threshold

If payments exceed 3x the executive's "Base Amount" (5-year average W-2 income), the company loses its tax deduction and the executive faces a 20% excise tax.

Three Standard Mechanisms

"Best Net" Provision

Market Standard

Executive receives full payout and pays tax, OR payout is cut back to $1 less than 3x base—whichever leaves the executive with more after-tax money.

"Cutback" Only

Buyer Friendly

Payment automatically capped at 280G limit to avoid excise tax. Protects buyer's deduction but hurts executive.

"Gross-Up"

Rare / Executive Friendly

Company pays executive's excise tax plus the tax on that tax. Highly expensive—effectively dead in public company deals due to shareholder opposition.

Private Company Exception: If target is private, check for a "Cleansing Vote"—shareholders (with >75% approval) can vote to exempt excess payments from 280G penalties.

Single vs. Double Trigger Acceleration

Equity (stock options, RSUs) often constitutes the largest part of deal value for executives. Understanding acceleration triggers is critical.

Single Trigger

Vesting accelerates immediately upon Change of Control (deal closing).

M&A Risk: Executive gets fully paid out with no financial incentive to stay post-closing. Buyers dislike this.

Double Trigger

Market Standard

Vesting accelerates only if: (1) COC happens AND (2) executive is terminated without Cause or resigns for Good Reason within 12-24 months.

Benefit: Serves as retention tool—executive stays unless buyer fires them.

"Good Reason" Definition

In double-trigger scenarios, executives can trigger payouts by quitting for "Good Reason." Scrutinize this definition to prevent executives from walking away with a check too easily.

Standard "Good Reason" Triggers

Material Reduction in Salary

Typically defined as >10% cut in base compensation

Material Diminution of Duties

E.g., Public company CFO becomes divisional controller of subsidiary

Relocation

Office moves >35-50 miles from current location

Red Flags: Vague definitions like "change in strategic direction" or "failure to be re-elected to Board" give executives too much power to voluntarily trigger severance.

Non-Compete Enforceability by State

Assess if restrictive covenants are actually worth the paper they're written on. State laws vary dramatically on enforceability.

Category	States	Notes
Banned	CA, MN, ND, OK	Generally void; may apply "Sale of Business" exception for equity sellers
Income Threshold	IL, WA, CO, OR, ME, VA, RI	Void unless exec earns above statutory threshold ($100k-$150k+)
Generally Enforceable	TX, FL, DE	Enforceable if reasonable in time/geography (usually 1-2 years max)

Sale of Business Exception: Even in states that ban non-competes (like California), there's often an exception for individuals selling their ownership interest. Check if the executive holds enough equity to qualify as a "seller" rather than just an "employee."

Standard Severance Obligations

Cash Severance

Typically 6-12 months for VPs; 12-24 months for C-Suite

Benefits Continuation

Payment of COBRA premiums for the severance period

Release Requirement

Critical check: Does the agreement require the executive to sign a General Release of Claims to receive the money? If not, buyer could pay severance and still get sued.