Equity awards are often given or approved by a Compensation Committee — language is typically "subject to approval by the Company's Compensation Committee" or something similar. Lately I've been seeing a lot of senior executive and C-suite layoffs as companies attempt to leverage AI and go "personnel light." In many cases, these employees are entitled to a grant of options, other equities, or performance-based units — all referred to here as "equities" — that have significant value.
The illusory promise problem
Companies know that an employee — even an at-will employee — is unlikely to leave hundreds of thousands in equity value on the table without a fight. Thus, many of the severance agreements I see provide for a future award of equities on the occurrence of some future event, or on a date in the future where they would have been awarded anyway had the employee still been employed.
However, no matter the actual intent of the company, these promises are illusory. Neither the HR department nor the general counsel nor the CEO can obligate the Compensation Committee to do anything. The promise of future equity is therefore based on the future largesse of the members of the Compensation Committee, who can really do whatever they want.
"Neither the HR department nor the general counsel nor the CEO can obligate the Compensation Committee to do anything. The promise of future equity is based on the future largesse of its members."
How to resolve it
The answers are pretty obvious once you recognize the problem. Before signing any severance agreement that promises future equity subject to Compensation Committee approval, consider the following approaches:
- Approval or delegation before signing. Get written confirmation of Compensation Committee approval — or of a valid delegation of authority to approve the award to the CEO — before you sign the termination and separation agreement. Then rewrite the clause as follows: "The Company has approved that Employee's outstanding RSUs and PRSUs scheduled to vest on [DATE] shall vest notwithstanding termination of employment…"
- Approval as a condition of the release. Add a clause that the Company must obtain Compensation Committee approval before the Qualifying Termination Date. If it does not, you may decline the release without losing any other payments already paid or due.
- Cash backstop. If approval is not obtained, or the units don't vest or settle, the Company pays a lump sum equal to the number of units times the closing price on the date they would normally be awarded, as a Separation Benefit consideration. You should also compare the tax treatment of a cash payment versus the equity award — the applicable tax rate can depend on the type of award — and adjust the amount accordingly.
- Structural alternative. This is the least appealing option: keep the employee on paid, non-working transition leave (commonly called "garden leave") through the award date, so the awards vest on their own terms. Severance payments would need to cover the period from actual separation through the future award date — if they are already equal to or greater than that period, you may just need to adjust the severance amount. This option doesn't cost the company much more, but it may change the tax treatment for the employee.
One more tool in your kit
Keep in mind that equity award plan rules are often buried in documents publicly available on EDGAR — usually as exhibits to 10-Q or 10-K filings. You can find these rules without waiting for the company to send them, and proceed with your ask proactively. Knowing the plan's terms before you begin negotiations gives you a meaningful advantage.
Reviewing a severance agreement that includes equity promises?
FineCounsel represents C-suite executives in severance and equity negotiations across North Carolina, Florida, and the United States. Contact us before you sign — most reviews are completed within 24–48 hours.
Schedule a Confidential ConsultationAttorney advertising. This article is provided for informational and educational purposes only and does not constitute legal advice. No attorney-client relationship is created by reading this article. Laws and plan terms vary. Do not act or refrain from acting on anything in this article without first consulting qualified legal counsel. Prior results do not guarantee a similar outcome.