call. “Tom, have you had a chance to read the agreement?”
“Yes.”
“As the layman, let me tell you what I think the agreement said. I’ll own ten percent of the company in the distant future. I’m vested two percent a year beginning twelve months from signing the agreement. If I leave, become disabled, or die any time before completing the five years — effectively six — my family and I lose all accumulated vesting.
“Second, since I will have made no contributions to the purchase price, I have no voting rights but am personally liable — for ten percent of the $50-million loan balance if the company goes belly-up.
“Third, the ten percent profit distributions don’t begin to accrue until 24 months after the signing of this agreement, which in plain English means three years.”
“I must compliment myself,” joked Tom. “I’ve taught you well. You get an A+ for that concise summary.”
“A+ for accuracy. F- for the terms. This is like a bullshit, phantom equity agreement,” I said.
“It isn’t like a phantom agreement.; it is a phantom agreement. It’s designed to protect the majority shareholders,” replied Tom. “They want to make sure you stick around to earn the equity, which speaks to your importance to the company.”
“Tom, I’m starting from a different place. I’ve already earned the equity stake based on my past contributions. And I’m committed to making sure my partners’ equity grow over the next five years.”
Tom smiled. “Given this agreement, you’re a partner in name only. Example: the fine print in Section II, Paragraphs 2 and 3, says you have no tag-along rights. So, if they decide to sell the company or go public, they can buy you out at the pre-event price and personally pocket the spread, which is almost certain to occur.”
“They wouldn’t do that!”
“Martin, this is business. Everyone tries to screw somebody.”
I was starting to get the picture.
“So, we need to agree on a negotiating strategy before you respond. I’ve got to ask you a few very personal questions. Do you and Lauren need the cash flow from your current position with the company?”
“It’s nice. Pays for a few extra trips, but no, not really; we’re fine.”
“Good. And what about the equity agreement? Suppose we can’t reach a satisfactory compromise.”
“I think I’d rather maintain my dignity and just walk away than accept their terms.”
“Given those circumstances, what do you want?”
“I want the ten percent, now, with no strings.”
“I thought you and Pete agreed on five percent.”
“They volunteered ten, so the new number is ten. Consider the extra five a penalty assessment for playing games.”
“And what about profit distributions?”
“Let’s compromise. I’m willing to wave distributions this year as a contribution to equity and start receiving distributions at the end of next year.”
“They’re proposing no distributions for three years.”
“I’m aware of that. But I have a high-powered New York attorney while they’re using some yahoo in Bridgeport.”
After a mutual chuckle, Tom, having negotiated hundreds of agreements, suggested an approach. “Since Craft seems to be the ultimate decision-maker, I’d take him aside privately and explain your concerns. Don’t be confrontational. We need to determine if the lawyers initiated the terms to protect their client or if Craft had them draw up the document to his specifications. Let’s hope it’s the former, because this is a poorly written agreement. I don’t think they have a lot of experience in these matters. So, if Craft’s in your camp, I’m fairly confident I can get his counsel to capitulate.”
“Suppose Craft put them up to it?”
“Then we have a different issue, and it will probably get a little testy.”
19.
Contract negotiations drag on, and on, and on.
Next day, I walked into Craft’s office. “Dawson, I’d like to talk to you about the agreement.”
“No problem, pal, just close the door.”
I unemotionally cut to the chase. “Dawson, I think the vesting period is too long; it ignores past contributions.”
Craft’s take was different. “No, pal, you’ve got it all wrong. Giving you ten percent of a company valued at $200 million in recognition of your past contributions. But to make the company grow, so we’re both worth a lot more, I gotta make sure you’re by my side for three to five years.”
I knew that was Dawson’s way of saying, let’s compromise the vesting to three years, which was probably his goal in the first place. He was quite unprepared for my counterproposal. “Dawson,” I said, balancing indignation and determination, “I’m going to make it simple. The stock has to be fully vested because this is my last corporate rodeo.”
“Jeremy and Eddie will flip. That’s not reasonable.”
I decided to gamble the house and throw him a life raft. I knew from Craft’s dealings with our field advisors that he abhorred confrontation. He preferred that others do the dirty work. He fancied himself The Great Compromiser, a modern-day Henry Clay. “Dawson, if that doesn’t work for you, I understand. We can just part friends. It’s been a great three years.”
“You’d leave me over this?” he said, totally befuddled.
I ignored his question. “If it would help, I’m willing to give the three of you my profit distributions at the end of this year as an equity payment. Based on my projections, that should put another million or two in everybody’s pocket.” I knew with fifty percent of the stock — after my ten percent — that meant about $4 million more in his pocket.
“You know something, Martin, I’m thinking while you’re talking. We’re friends; we shouldn’t be negotiating against each other. I’ve got a business to operate, and I need you to focus on staying one step ahead of our competition. That’s really how we all win. Let’s have the attorneys wrap this thing up.”
~
The push back from his partners was more than Dawson imagined. Carr was concerned about not having strings on me, but liked the profit distribution. He had just bought a $4 million house and was in hock up to his eyeballs. He, like Craft, was willing to eliminate the twenty-four-month waiting period that Friedman had incorporated into the agreement.
Costas was considerably less docile, since he was the least convinced about my past, present, and future contributions. “There is no way in hell I’m giving up any of my equity under those terms. Eddie, I can’t believe you’d even consider such a stupid thing.” He stared at Craft. “If you’re so damn sure about Martin’s added value, then take the equity
