What They'll Never Tell You About the Music Business

by Peter M Thall

  Of course, some executives, for security or other reasons, may prefer that the term be longer rather than shorter. Given the mercurial nature of some industries—including the music industry—even if an executive is confident in his or her ability, three to five years of guaranteed salary and bonuses do not look so bad. An additional reason some employees prefer to contract for a longer term is that a longer term will affect the magnitude of the payout in the event of early termination.

  DUTIES

  While the title of the person who is being hired is usually set forth in the agreement, it is not always clear what that person’s responsibilities are, what the reporting lines are, and, ironically, what kind of flexibility the employee has in actually fulfilling his or her responsibilities—or even going beyond them in exceeding the expectations of the employer. It is important for the employee, and the person he or she is to report to, to talk through these issues and to find a way to clarify any ambiguities and to incorporate their understandings and expectations into the written document.

  Here is an excerpt from a typical—and typically ambiguous—employment contract:

  Employee shall have all the authority and responsibility customarily associated with such position in a company of the size and nature of the Employer.

  During the term, Executive shall devote substantially all of his business time and his efforts, business judgment, skill and knowledge exclusively to the advancement of the business and interests of the Company and to the discharge of his duties and responsibilities hereunder.

  Clear? Clear as mud. And the consequences—in terms of the provisions in the termination section of the contract, which doesn’t come up until pages and pages later in the document—can be serious, as one of the bases for termination for cause is the “repeated failure or refusal to materially perform one’s duties and responsibilities as set forth in this agreement.” There are two things you or your representative need to consider here: securing what are called “notice and cure” provisions, which require the company to tell you of a problem and then give you the opportunity to explain or fix it, and/or articulating with precision what the employee’s actual duties are supposed to be. If you do neither, you will have to live with the ambiguity of the “duties” provision and you will be relegated to a negotiation, upon termination, consisting of arguing “on the one hand, on the other hand” with the company’s legal department.

  REPORTING LINES

  One area of concern at the time of the initial negotiation is to ensure that the employee has the right to report to a particular position in the company, for example, the president or the CEO. Prospective employees are not usually allowed to attach the name of a particular person to that position. (So-called “key man” clauses, which provide for this, are anathema to most corporations.) They can, however, try to ensure that no other person will come between them and their functions vis-à-vis the president (or CEO, or vice president of operations, or whomever). Being specific about the position to which the employee is to report protects against the employee’s being marginalized or layered by virtue of the placement of another position between the employee and the person to whom he or she was expected to report. The employee may even have aspirations for the higher job—or perhaps was even promised that such advancement was in the cards—but if the employee no longer reports to the person he or she was supposed to report to, the chances of moving up are naturally reduced at best and eliminated at worst.

  If the contract specifically addresses this issue and the company doesn’t live up to the provisions, a variety of remedies are possible. Some of these will come out of existing applicable law; others may actually be inserted into the contract; for example, the employee will have the option to terminate the agreement—possibly with a penalty assessed against the company. Damages might include the immediate vesting of stock options, a flat-fee payout, the continuation of health-related benefits or compensation so the employee can obtain such benefits elsewhere, a reduction of the ordinary mitigation responsibilities of the employee, and relief from certain post-term responsibilities or restrictions. Another possibility is that a rerelocation provision that was supposed to have expired after a year of employment can be revived.

  CONFIDENTIALITY AND COMPETITION

  When an employee’s skills, experience, and relationships are specialized within any particular industry, the most egregious limitation that can be placed on that person is a prohibition against competing, at a future date, with the company with whom he or she is entering into an agreement.

  Anticompetition provisions take several forms and are designed to protect against different outcomes. One such provision seeks to protect against the disclosure, or use for the benefit of others, of any information regarding the activities of his or her employer that is of a secret or confidential nature. This information can take the form of financial information, contracts, contacts, contract proposals and negotiations, plan development, administrative procedures, and dealings with a party with whom the employer has entered into contracts. Obviously, in every field, and in particular in an industry whose “architecture” is essentially closed—such as the music industry—even so-called “private” information is hard to protect. Gossip runs rampant; publications (such as Hits magazine) and Internet sites (such as The Velvet Rope) are successful in large part because of their very active rumor mill. Anyone in the music industry, and his or her attorney, must be clear with each other as to the parameters within which they are expected—and willing—to keep a closed mouth. A music industry employee’s very strengths may be as a person who knows “everything and everybody,” and zipping such a person’s mouth may be impossible or counterproductive.

  Other anticompetition promises can ruin an employee’s chance to make a decent living, or even to stay “in the game” of his or her particular profession, after the term of the employment agreement has expired or is terminated. One is the promise not to work in the employer’s business for a specific period of time (it might be two years but could be as long as five, seven, or even ten years) within a limited geographical area (let’s say within a radius of fifty miles from the location of that business). This promise is usually sought from someone who is an employee of a business being purchased by another entity; the purchasing company wants to keep the employee on staff for a period of time to help in the transition. Record company executives whose independent record labels are purchased by a major often are required to make this kind of promise. Naturally, to be barred from one’s profession for an extended period is something not to take lightly, although the money paid to the promising party is likely to be sufficient for him or her to agree.

  The same advantages are not usually offered to professionals who are not entrepreneurs. A second approach to anticompetition promises involve restrictions not on whether, but on how, or the extent to which, the terminated employee can pursue his or her profession. Take, for example, a personal manager, or a producer’s manager, whose team has been “adopted” by a company that wishes to take advantage of the employee’s experience, contacts, and roster. Restrictions are often placed on the employees such that they cannot solicit the artists (or producers) signed to the umbrella company during the term of the employment for a period of years (usually two or three) once their deal ends with the umbrella company. This can be devastating to people who have spent the past three to five years, say, nurturing the business. In essence, they are left with no one to manage. I alert such managers and their attorneys to be careful to at least provide that any noncompetition provision of this nature be waived if the employer terminates the agreement without cause. Of course, employers are reticent to lift restrictions at least until the date on which the term would naturally have ended if they going to have to pay out the employee’s salary to the end of the term anyway. This scenario would occur after, say, they shut down the management division for whatever reason. It is very difficult to deal with a firing without cause. Although the employer usually has to
pay out the remainder of its obligations, there is always some damage done to the employee, if only to his or her reputation. Building in a penalty in such situations (such as a waiver of a noncompetition provision) is often a good move.

  Another aspect of anticompetition provisions applicable upon departure deals with restrictions on the part of the employee from soliciting other employees or contracting parties and bringing them to the employee’s new company (whether a third-party company or the employee’s own entrepreneurial venture). There exist many state, federal, and even constitutional provisions that can reduce the impact of such provisions, but a litigation may ensue that can be very expensive in terms of time, money, and the stress it brings to the litigant. At a minimum, you should try to exclude from such prohibition your personal assistant or secretary, or any person whose services are more or less indispensable and not easily replicated. Sometimes the employer may be vengeful enough to refuse to allow you to take an assistant with you, then terminate the assistant’s employment shortly thereafter, thereby inconveniencing all concerned but the employer.

  Finally, an employee may comfortably (or not) agree to refrain from soliciting former colleagues but should not be precluded from hiring them should the colleagues themselves seek such employment on their own volition. I have always been reticent to “steal” a lawyer (or secretary, or paralegal assistant for that matter) from another firm with whom I do business, but once the person announces that he or she is leaving and is going to knock on yet another competitor’s door or on mine, I feel no such reluctance. This is a fine point, but it can free up the employee a bit and creates more room for discussion before a real legal claim for violation is brought. It is easy to prove that a former employee violated a “Thou shalt not hire” clause, but it is much harder if the clause is limited to “Thou shalt not solicit.” The problem, of course, lies in the proof.

  While it may seem premature to deal with down-the-road failure of the employer-employee relationship while negotiating the terms of an employment agreement, there is no better time to protect against possible adverse consequences of termination than when things are rolling along just fine. In instances such as those I have just referred to, the employer may actually still be paying out the employee’s salary for the remainder of the contract term (no matter that the employer has shut down the division, fired all staff and assistants, removed the employee from the premises, stopped paying benefits, and stopped reimbursing the employee for expenses incurred on behalf of the employer’s business). The employer may feel that, because it is still paying out the employee’s salary, it is entitled to any and all anticompetition restrictions. Yet the employee is, in a sense, paralyzed—unable to build his or her profession or pursue new business opportunities. The employee’s career is, in a real sense, on hold. The careers of his or her clients are also on hold, and they very well might have no other choice during this period of limbo but to move on and hire other managers to serve their professional needs. Termination without cause followed by full payout of one’s salary—even in a lump sum payment—may sound reasonable on paper, but it can be a recipe for tremendous frustration and financial horror if it is not coupled with simultaneous waiver of the other rights that the employer would normally have enjoyed had the employment contract been honored in its entirety. It would not even be outside of the range of fairness to build in a penalty if the promise of the employment term is unfulfilled due to the failure of the company’s executives to keep the company afloat. High-level executives (including in-house attorneys) who take a chance with a start-up company often give up solid employment to take the new job and are left in a vulnerable position professionally if the start-up goes belly up.

  STOCK OPTIONS

  The coming (and going) of the age of the dot-coms has universalized the subject of stock options beyond the bounds of the traditional corporate boardroom. In order to put a value on a stock option offer or even to know what to ask for, a great deal of information is necessary and it is useful to have a business manager familiar with such issues assist your attorney in counseling you as a prospective employee.

  Of course, some companies (for example, Bertelsmann AG; Peermusic) are not publicly held companies, and stock options are simply not available to their employees. But there are many ways to “equalize” an offer from a public company with that from a privately held one. The principal way is to seek to ensure that the executive’s compensation is commensurate with that of other people at that level in the industry. Participation in compensation programs can take many shapes, and stock options are not necessarily the most advantageous to the employee. This is especially advantageous in cases of termination with—or without—cause.

  Following are a few recommendations to those who may be receiving stock options pursuant to an employment contract:

  • You may secure acceleration of vesting in the event of a termination other than for cause or in the event of death, disability, or departure for “good reason.”

  • You may secure accelerated vesting based upon the financial performance of the company (that is, a profit metric or some aggregated stock price appreciation) or the employee’s [your] performance or on other specific criteria.

  • You should be sure to determine whether the options are qualified under the tax code (that is, they are capable of producing taxable value for you, the employee, at the capital gains rate) or nonqualified (that is, the proceeds will be taxed at ordinary income tax rates).

  • Find out the exercise or strike price—the price you have to pay for each share of stock when you exercise the option. This price is usually the market price of the stock on the day you received the option. The difference between the strike price and the current market price on the day you exercise (buy) your stock is taxable in the year the event takes place. This tax will be a problem if the stock you buy is illiquid (does not trade on a public stock exchange). Remember, it’s just as if you were holding real estate; you are holding stock, not cash. You may have to sell it to get enough cash to pay the tax, and in closely held, nonpublic companies, it is often difficult, if not impossible, to sell your shares until the company goes public or is bought out.

  • Check the vesting schedule to make sure that you are receiving the best possible vesting-rate status vis-à-vis similarly situated personnel.

  • Read your stock option plan and make sure your postdeparture option exercise rights are acceptable. Do unvested options lapse? Under what circumstances will you be able to exercise vested options after your departure and for how long postdeparture will this right last? Do you have to exercise the options—that is, buy the stock—on or before your departure or do you have some time after you leave? Suppose, for example, you are forced to exercise the options within, say, thirty days of leaving or lose them. Remember, you will have no job and maybe no cash. If there are taxes due (see the fourth bulleted item above), and you don’t have the cash to pay the taxes, you will not be able to afford to exercise the options. Does the plan allow for “cashless” exercises, namely, the right to exercise an option and simultaneously sell the underlying security, thereby enabling you to cover the exercise price out of the sale proceeds? Or must you write a check and fork it over to the company?

  Remember, stock options are merely another form of compensation—one that does not require immediate outlay of cash by the employer or the employee. You may prefer to forgo the risk of stock options becoming ultimately valueless by substituting a provision that will provide you with future bonuses to be paid in cold cash.

  PERKS

  Some perks are based on profitability; some are not. In some areas, parking space counts big time; in others, not at all. In some cities, the lease of a car (especially diesels during gas shortages) matters more to the employee than perhaps any other term of the employment agreement! Other perks include the reimbursement or assumption of attorneys’ fees if the employee sues on the contract (and wins); reimbursement for attorneys’ fees expended simply to negotiate
the employment agreement in the first place; graduate schooling (for example, special weeks’ or months’ programs at universities for management training; MBA programs; other programs for executives offered by various business schools [sometimes with a cap of $X per year); the cost of a home office (for example, the cost of an up-to-date laptop, cell phone, DSL line); special medical plans, even gardening services and opera tickets (I refer you to Jack Welch’s deal as CEO of General Electric).

  There are often formulas established for bonuses based on earnings; the assumption of country or university club dues (which are otherwise not deductible by the employee); daily car service; and preferred classes of air travel and hotel accommodation. Sometimes the perks can be as simple (and as useful) as a budget to hire a staff assistant who will make the life of the executive easier and more productive. School fees for children’s education is a popular perquisite, one that is nothing less than a necessity in certain cities. While the schools in Geneva or Paris or London are ostensibly better, on average, than those in American cities, the employee who is based outside of the United States may wish his or her child to obtain an “American” education nevertheless, and the cost for this is substantial, as is the cost of SAT or ACT preparation, which is practically essential for an American child brought up in a foreign country. This can amount to many thousands of dollars in the child’s junior or senior year in high school.