Adding a New Partner to an Established Agency

Overview

Boasting $20 million in annual sales, an independent agency (the "Agency") decided to strengthen its business by hiring a successful executive (the "Executive"), who was then working as a senior executive with a multinational, public advertising holding company. The Executive possessed extensive client contacts and a desire to assist the Agency in getting to the next level. Though the Agency was excited about the prospect of new clients and increased revenue, it contacted my Firm to assist it in structuring the Executive's equity ownership and compensation package.

Objective

The Agency was both eager and anxious to make a deal with the Executive. As a result, its objective was twofold; (1) to compensate the Executive as a senior officer of the Agency in managing existing client relationships and promoting business development and (2) to provide an incentive for the Executive to earn equity in the Agency that would vest over a number of years.


Strategy

When confronted with the Agency's initial compensation and equity package, the Executive balked and threatened to remain with his current organization. He demanded that his equity interest in the Agency vest immediately as an incentive for him to make the move. The Agency contacted my Firm to collaborate on a strategy that would enable the Executive to posses his entire share of equity immediately and simultaneously provide the Agency with a mechanism that would enable it to recoup the equity should the Executive fail to perform or act willfully or negligently against the Agency. The Agency and my Firm collaborated extensively to draft documents that would benefit all of the interested parties, including the other equity holders of the Agency.

My Firm drafted both a Membership Agreement by and among all of the equity owners of the Agency, including the Executive and a separate Employment Agreement by and between the Executive and the Agency. The Membership Agreement set forth the rights and responsibilities of each of the Members (equity holders) of the Agency, and the Employment Agreement detailed the Executive's compensation structure and official duties. In this matter, the twist presented itself in the form of a mandatory giveback of equity by the Executive should he perform certain actions that would have an adverse impact on the Agency's business. The giveback would decrease proportionately over a five year period until no obligation remained.

Outcome

The end result of the teamwork between the Agency and my Firm was the execution of a Membership Agreement and an Employment Agreement that expertly provided the Executive with full equity ownership in the Agency, but also included a mechanism enabling the Agency to recover such equity in the event that the Executive takes action detrimental to the Agency's interests. To this day, the Agency remains an extremely successful independent advertising agency.