As a well-known and highly regarded Marketing Consultant to large automotive dealerships, he was presented with what seemed like a grand opportunity: To come on board, Kurt would have to leave a secure and long-term position with his firm. And, too, to come on board Kurt would have to take a significant cut in income for three or four years. But other things were quite enticing.

First, the people putting the deal together were part of a highly experienced and highly regarded Private Equity firm with a proven track record in automotive private equity businesses. Second, the team being put together to run the new company was top-notch, each in his or her own way an expert in one aspect or another of the automotive business.

The pitch was simple: And, so, for four years Kurt and his colleagues did everything humanly possible to build the business into a highly profitable machine.

Four years later, just six months or so before the company was to be sold to the public in an IPO, Kurt and his colleagues received something they did not understand: We reviewed the papers before us, and gave Kurt the bad news: The worst part was that Kurt had agreed to just that way back when he was hired.

Not a good result for Kurt, or his colleagues. Four years of hard work, at low pay, without benefits, all for a dream that just disappeared. Over the years I have reviewed scores of agreements for employees going to work for Private Equity firms. Though I have come to expect to find repurchase rights in such agreements, I have never heard a good reason for their being there. No matter what the paragraph or section is labeled, if the effect of the words is that you can be forced to sell your equity at a price determined by others, tread most carefully.

If you are important enough to your prospective employer, the company will remove the repurchase rights, or agree to other measures to reduce the loss to you. If your prospective employer will not do so, you will be faced with a difficult decision: In business, it is important that you a identify risks, b assess those risks, and c reduce or eliminate those risk. When it comes to repurchase rights, there are steps you can take to do just that, if you are willing to devote the effort to do so.

WHAT YOU CAN DO: I would recommend that anyone who is expecting to gain financially from a grant or purchase of equity stock should have an attorney review the papers before they are signed. They are wrong, The words of an agreement govern the effect of that agreement.

Ask, first, that the repurchase rights be removed. Many of our clients have been successful in this way. However, others have not. One thing is for sure: How about we put this in the agreement: If you would agree to this, then we can move forward?

You might ask that the valuation be a explained in writing in full detail, b be done in accordance with customary valuation techniques, and c be subject to review by an independent valuation expert of your choice. You might also ask that an independent valuation be conducted by an independent third party.

Be wary of that phrase, as it is an accounting term that can be highly manipulated. It may encourage a more honest valuation of your equity, and could also serve as the basis of a legal claim later on that you did not, in fact, get paid what you should have for your repurchased equity.

Frankly, this is rarely granted, but it does often serve to motivate employers to be more flexible in other requests you may make, noted above. Be wary of later amendments to the stock equity agreement. Over the past several years, Private Equity firms have come to purchase and own more and more businesses. A quite common mode of these firms is to buy hopefully at a low price , hold for five years, and then sell hopefully at a higher price.

Stock Repurchase

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