Golden Handcuffs

There are several types of good things that are, um...golden. But, because we're a PG-rated site, we'll just discuss the financial flavors.

Both of these flavors of gold have to do with star CEOs, CFOs, CTOs, and other C-level rock star officers the company definitely wants to retain and keep happy. So you can imagine a CEO being given a big fat pot of a million stock options, just at the point where the company has escaped bankruptcy, fired the old management, and brought in new, talented players who can sink holes-in-one at will, open up China with no taxes, and part the Red Sea.

The stock has been sitting in purgatory at 5 bucks a share, and at only a modest stock market-like multiple, the stock would be trading at $25/share. Should the company get a little lucky, it could go to $40. So if that CEO is granted what will become golden handcuffs, in the form of a million stock options with a $5 strike price, which then end up being $20 in the money on the $25 stock price. The CEO will have vested into those golden handcuffs only if she stays at the company through the vesting period, which is usually four or five years.

Or, said another way, in order to actually earn ownership of those highly valued stock options, the CEO must continue stewardship of the company for all four years of what is called “vesting,” or letting time pass, such that she fulfills her contractual obligation in running the company, and then benefits from the economic gains she has created in doing so.

So...that’s a golden handcuff. There's also something called a golden parachute.

If that CEO ended up doing a great job for her initial four years, and the stock had run up to $40/share, and the board still wanted to keep her as CEO, then one of the great benefits she might be able to negotiate for is a golden parachute, which generally refers to the notion that if she's ever fired without cause, or if the company is purchased by Google or whoever, after only a year-and-a-half into her four year vest, or tenure...then she receives what is called full vest on change of control.

That benefit basically means that, if she had 48 months of vesting to then vest into the incremental million shares she was granted at $40, with the acquisition being done at $62/share, and those shares now being $22 in the money, she will have been at the company for only 18 out of 48 months of vest...so that, in theory (with 18 over 48 equaling 37.5%), she would only get that percentage of the $22M in gains that her stock options represent...or $8.25M.

But with golden parachutes like full vest on change of control, she is guaranteed the full payout of that $22M.