In this article we review an unpaid bonus in the context of an MBO plan.  An unpaid bonus claim is straightforward.  The Company promised the employee a bonus for hitting certain targets.  The employee hit the targets.  The Company failed to pay, resulting in a claim for unpaid bonus.  The unpaid bonus can run from low thousands to hundreds of thousands of dollars based on employee role and company size.
What is an MBO Compensation Plan?

Also known as a “bonus plan,” “quota plan,” “incentive compensation plan,” “performance based compensation plan” and an array of other terms, “MBO” literally means management by objective, and in practice refers to any compensation plan where total compensation is determined based on a “pre-set” formula tied to volume, gross margin, revenue or another objective metric or metrics. MBOs are commonly used for the employees working in sales, business development or the executive suite.

Everybody Wins, Right?

Employers like MBO plans because if the employee does not perform, then typically no additional compensation is due under the MBO plan, which helps the Employer match revenue and expenses. Employees love MBO plans because there is theoretically no limit on how much money they can make. These plans appeal to the enterprising, self-starter who wants to work hard, and get a clear, direct reward for his or her performance.

Where It Goes Wrong

It all seems so easy, how can there be any problems? Issues arise when the performance period (whether quarter or year) comes to a close, performance has been delivered and it is time to measure performance and deliver on payment promises. For the employee, there is an obvious motivation to get as many transactions as possible to count towards their totals. For the employer, there is an opposing motivation to lower it payment obligations either by (1) aggressively applying the MBO by using any ambiguities to disqualify deals or (2) retro-actively revising the MBO outright (when management wishes to revise the MBO plan retroactively for any number of reasons — these revisions only mean one thing, compensation paid to the employees covered by the MBO plans, in general and in specific, is going DOWN.).

This situation occurs frequently across companies of all shapes and sizes and can quickly cause the employment relationship to deteriorate. In many cases, the employee will claim that the employer has received all the benefits (i.e. new revenue), and is now failing to deliver on it payment promises. Likewise, in such cases the employer will claim that the employee is counting improper deals, claiming credit for the performance of other employees and/or even engaging in unethical behavior!

If you find that your compensation plan has been retroactively revised, or if your employer has failed to pay bonuses or other compensation that is owed to you, we recommend that you consult with an attorney immediately.

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

For more information about this topic or to speak with Chris Adishian:

Telephone: 310.726.0888 | 650.646.4022 | 415.955.0888
Email: askalg@adishianlaw.com
Social Media: @algpc |   LinkedIn | Facebook | YouTube

In this article we tackle the question:  “Are stock options wages under California law?”
The Definition of Wages in California

Under California Labor Code §200 wages are defined to include “all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation.” Further, California courts have specifically held that a “bonus” constitutes wages. See Ralphs Grocery Co. v. Sup. Ct. (Swanson) (2003) 112 Cal. 4th1090, 1103, 5 Cal. Rptr. 3d 687, 697 International Business Machines Corp v Bajorek. Pursuant to California Labor Code §201 et. seq., if an employer discharges an employee, the wages earned and unpaid at the time of discharge are due and payable immediately. The California Labor Code goes on to provide for waiting time penalties, interest and attorneys’ fees should an employer fail to timely page wages in whole or in part.

Traditional Rule: The “Fixed or Ascertainable” Test

In 1999, stock options were held to not fall within Labor Code § 200 because they are not “amounts” of money, and their value cannot be ‘fixed or ascertainable.’ Int’l Bus. Machines Corp. v. Bajorek (191 F3d 1033, 1039-1040). The Court in IBM wrote:

“The statute does not apply because its words read literally and in light of its purposes do not apply — stock options are not “wages.”  Wages are defined by the statute as “all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation.” *fn17 Stock options are not “amounts.” They are not money at all. They are contractual rights to buy shares of stock. . . . The amount of money for which the shares can be sold on the market varies unpredictably from time to time, so it is not “fixed or ascertainable” by any method of calculation when the agreements are made or exercised. . . . they ordinarily do not give rise to an expectation of a calculable sum of money. *fn18. The value of the stock awarded in options may be as much affected by the fortuities of stock market behavior as by the profitability of the company.”

Does the IBM decision still make sense?

Int’l Bus. Machines Corp. v. Bajorek was decided in 1999, three years before Sarbanes-Oxley and about six years before US GAAP adopted the standard practice of “expensing” the value of stock options.

If stock options can in fact be “expensed” — then it must be that Companies are capable of assigning options a “fixed or ascertainable” value (either through Black-Scholes, the binomial model or some other methodology). Thus, if stock options are “fixed or ascertainable”, then it would seem to follow naturally that they are wages and subject to all the protections afforded to employees under the California Labor Code.

Examining the contrary position, saying that stock options are “fixed or ascertainable” for financial reporting purposes but not “fixed or ascertainable” for the purposes of calculating wages under law would seem to contort reason. In fact, to our understanding, that is the very purpose of “expensing” options — so that the shareholders know how much the Company is paying in wages via stock options!

Implications for Employees with Stock Option Compensation

It is well settled that California public policy requires the prompt payment of wages. With the development of significant secondary markets for securities in privately held Companies, we believe that the recognition of stock options as wages has potentially significant impact for owners and employees in start-up companies in Silicon Valley and elsewhere where compensation packages are typically well-below market in salary and heavily weighted with stock options. We also believe that this issue is significant for Senior Executives of publicly-traded Company whose compensation consists of significant stock option grants. Some questions to consider:

What if your stock options are vested but unexercised and you are terminated?
What if you are terminated just prior to your first block of stock options vesting (e.g. cliff vesting)
What if you are terminated just prior to additional stock options becoming vested?
What if your vested stock options expire after your termination?

What if we substitute the words “earned wages” for “stock options,” in the preceding questions? Does your answer change?

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

For more information about this topic or to speak with Chris Adishian:

Telephone: 310.726.0888 | 650.646.4022 | 415.955.0888
Email: askalg@adishianlaw.com
Social Media: @algpc |   LinkedIn | Facebook | YouTube

California is home to over 35,000,000 people. With all those real estate transactions happening in the State, it has become common for an allegation of a “failure to disclose” to arise after escrow has closed on a residential sale (e.g. condo or single family residence). This article does not address any failures to disclose in commercial transactions.

What should you do if you believe a Seller has “failed to disclose” a material item?

California courts have answered this question by empowering a the Buyer with a common sense choice, called an “election of remedies” — the Buyer can (1) file a Complaint for Rescission or (2) Affirm the Contract and Sue for Damages. In English, Option 1 means that a Buyer can ask a Court to order the Seller to take the property back and repay the Buyer (with certain credits and offsets for the time period the property was owned by the Buyer), such that both parties are returned to their prior positions before the sale. Option 2, means that a Buyer can simply elect to keep the property and sue the Seller for damages (i.e. money). (The calculation of damages will be the subject of another post).

Liability v. Damages

The law makes a fundamental distinction between liability and damages. Liability means that a party is legally responsible for the “damages” caused by his wrongful act (i.e. he/she broke the law). Damages is a legal attempt to quantify the harm so that a Court can order the party liable to pay money.

In some failure to disclose cases, there may be liability but no damages, and in such cases the Courts want the parties to move on with their lives, even where one party clearly failed to disclose something that they should have disclosed. In such cases, the rule boils down to “no harm, no foul” (or “he / she lied, but so what”).

In other failure to disclose cases, there can often be SUBSTANTIAL AMOUNTS of money at stake, climbing into the HUNDREDS OF THOUSANDS or even MILLIONS!

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

For more information about this topic or to speak with Chris Adishian:

Telephone: 310.726.0888 | 650.646.4022 | 415.955.0888
Email: askalg@adishianlaw.com
Social Media: @algpc |  LinkedIn | Facebook | YouTube

Selling a minority interest in a privately held business in California must be handled thoughtfully. First, if you are able to sell a minority interest in a privately held business for a profit (whether small or substantial) you are already on a good path. This article addresses some considerations for an individual minority owner who is also an employee.

The good news is that you are getting paid for your hard work and getting a return on your investment. These are the rewards that capitalism provides. The bad news is that your Company may try to limit your ability to own and operate a similar business for a period of years or within a specific geographic region through a non-compete agreement.

You may say, “Wait, I read ‘Non-Competition Clauses In California: It’s No Contest after Edwards,’ which says non-compete agreements are void in California.” They are ….for pure employees. However, there are narrow exceptions under 16601, 16602 and 16602.5 which provide that a seller of “substantially all” of his/her/its assets, goodwill or interest in a business “may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.”

Here, there are elements of both the employee relationship and the owner relationship. Despite being an “owner” many “owner-employees” are not financially independent such that they can afford to not work for an extended period of time, even with a substantial payout from the sale of their shares — taxes, mortgages, school tuition and debt incurred during the formation and growth of the business all add up quickly. Therefore, the owner-employee must tread carefully so as to not restrict his or her future ability to earn a living or maintain his or her lifestyle when agreeing to sell his or her shares.

On the one hand the owner-employee is often not required to agree to any and every restriction, on the other hand the employer is often not required to repurchase the shares. The may language will naturally result in a negotiation of the future restrictions on the activity of the owner-employee, which will often become a material business point affecting the purchase price paid for to the owner-employee for the shares or whether the sale will even be consummated at all. 

Adishian Law Group, P.C. assists owners of privately held companies in the negotiation and sale of their shares or membership interests to maximize the value of their ownership interest while allowing them reasonable freedom to pursue their next entrepreneurial dream or investment. If you are contemplating the sale of your interest in a corporation, limited liability company or partnership, we recommend that you consult and attorney before concluding the purchase and sale agreements.

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

For more information about this topic or to speak with Chris Adishian:

Telephone: 310.726.0888 | 650.646.4022 | 415.955.0888
Email: askalg@adishianlaw.com
Social Media: @algpc |  LinkedIn | Facebook | YouTube

Selling a your minority interest in a privately held business in California must be handled thoughtfully. First, if you are able to sell a minority interest in a privately held business for a profit (whether small or substantial) you are already on a good path. This article addresses some considerations for an individual minority owner only (e.g. not an owner-employee).

The good news is that you are getting paid for your hard work and getting a return on your investment. These are the rewards that capitalism provides. The bad news is that your Company may try to limit your ability to own and operate a similar business for a period of years or within a specific geographic region through a non-compete agreement.

You may say, “Wait, I read ‘Non-Competition Clauses In California: It’s No Contest after Edwards,’ which says non-compete agreements are void in California.” They are ….for employees.

However, there are narrow exceptions under 16601, 16602 and 16602.5 which provide that a seller of “substantially all” of his/her/its assets, goodwill or interest in a business “may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.”

Due to the may language this will naturally result in a negotiation of the future restrictions on the activity of the seller, which will often become a material business point affecting the pruchase price paid for the Seller’s shares or whether the sale will even be consummated.

Adishian Law Group, P.C. assists owners of privately held companies in the negotiation and sale of their shares or membership interests to maximize the value of their ownership interest while allowing them reasonable freedom to pursue their next entrepreneurial dream or investment. If you are contemplating the sale of your interest in a corporation, limited liability company or partnership, we recommend that you consult and attorney before concluding the purchase and sale agreements.

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

For more information about this topic or to speak with Chris Adishian:

Telephone: 310.726.0888 | 650.646.4022 | 415.955.0888
Email: askalg@adishianlaw.com
Social Media: @algpc |   LinkedIn | Facebook | YouTube

The concept of ownership is deeply woven into the American Dream — e.g. own a home, own public stock, own bonds, own a business — so deeply woven in fact that sometimes “ownership” becomes the goal regardless of the consequences attendant to that “ownership.” Yes, when done properly, with due attention to the risks, rewards and ROI (return on investment), ownership can create equity expansion and increase net worth like few other opportunities in our economy.

However, poorly thought out investments in privately held Companies can lead to “dead money”, where the only “return” is pride of ownership and you cannot get your money out. That is, you get to tell your friends and family that you are an “owner of this Company” but in fact you see no financial benefit to this ownership at all! Even worse, such investments can result in a complete loss of the capital invested. Either way, the money is effectively gone, and you are unable to use it in another productive investment. Bad result.

Some points to consider before investing in a privately held company:

  • Will I ever see a return on my investment?
  • How will I see that return? (Dividends, interest, appreciation?)
  • How likely is it that I will actually see that return?
  • Will I ever get my original investment back?
  • Can I sell my stock to somebody if I want/need my money (or some of it) back?
  • At what price can I sell my stock?
  • How long will that take?
  • There are many other issues to consider as well.

Adishian Law Group, P.C. assists investors in privately held companies in maximizing the value of their ownership interest and minimizing the risk of capital loss or “dead money.” We assist with the “capital allocation decisions” for both majority and minority shareholder positions, as well as subsequent ongoing management of these investments. If you are contemplating an investment in a privately held company, or you are already a minority investor, we would be happy to talk with you about your options for increasing the value of your shares.

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

For more information about this topic or to speak with Chris Adishian:

Telephone: 310.726.0888 | 650.646.4022 | 415.955.0888
Email: askalg@adishianlaw.com
Social Media: @algpc |  LinkedIn | Facebook | YouTube