The problem with employee equity compensation documentation

March 9, 2022

Recently we received an inquiry from a finance professional. She worked for a reasonably successful start-up and had been awarded what she assumed were shares or share options at various stages throughout the company’s development. Each time she’d been granted these equity awards she’d been directed by the company’s HR department to electronically sign a number of agreements. These agreements were of the kind we’re used to seeing - dozens of pages of dense text with a counterintuitive drafting structure, the defined terms being at the start and the key terms being buried somewhere in the middle. She had a few questions - 1) What exactly do I have? 2) What happens if I leave the company? and 3) what happens if the company is acquired?

She’d asked her HR department these questions and they advised her to seek legal advise, something which she took to mean that they didn’t understand them either. She’d then reached out to colleagues who had received similar awards and they didn’t really know either. This is a pervasive problem - legal documentation not drafted with the audience in mind. Here the audience are employees who are being incentivizes by stock. They’re not legal professionals and shouldn’t need to retain counsel to understand the terms of their compensation - that should be incumbent on the employer.

To decipher the documentation took us a few hours and the end result was a surprise to the employee. She didn’t actually own equity, but Unit Appreciation Rights which are the phantom equity equivalent of options. These entitled her to a potential cash payment upon an acquisition or IPO, but nothing more. “Why can’t it just say that in a summary page?” she asked. Good question.