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.
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Finance: What are Golden Handcuffs/Golde...9 Views
Finance a la shmoop what are golden handcuffs and what's a golden parachute?
well guess what there are several types of good things golden but because we're [Trump dossier folder opens]
a PG rated site I will just discuss the financial flavours so both of these
flavors of gold have to do with star CEO CFO CTOs and other c-level rock star
officers that 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 [CEO picks up pot of stocks]
the point where the company has escaped bankruptcy is on the mend and has 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 five bucks a share forever and at only a modest stock
market like multiple the stock would be trading at twenty five dollars a share [Stock value rises]
well should the company get a little lucky and 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 five dollar strike price which then end up being twenty dollars
in the money on the twenty five dollar stock price that comes from their hard
work well then that CEO will have vested over say four years into those
golden handcuffs only if she stays at the company throughout that vesting
period and yeah that's four or five years something like that usually so [Man discussing vesting period]
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
or five years of what is called vesting or letting time pass such that she [Clock ticking by]
fulfills her contractual obligations in running the company and then she
benefits from the economic gains she's created in doing so like she participates
in the wealth created for all the shareholders of the company alright so
that's a golden handcuff and what's a golden parachute well if that CEO ended [Golden handcuffs appear]
up doing a great job for her initial four years and the stock had run up to
forty bucks a share and the board still wanted to keep her on as CEO well then
one of the great benefits she might be able to negotiate for is a golden [Image of golden parachute appears from folder]
parachute which is a big benefit and generally refers to the notion that if
she is ever fired without cause or if the
company is purchased by Google or whoever
after only say a year and a half or so into her four year vesting period
or tenure well then she receives what is called full vest on change of control
and that benefit basically means that if she had 48 months of vesting to then
vest into the incremental million share she was granted at forty bucks with
the acquisition being done at a sixty two dollars a share and those shares now
being twenty two dollars in the money well she'll have been at the company for [Month 18 appears]
only eighteen out of the forty eight months of vest so that in theory with
eighteen over forty eight equalling thirty seven and a half percent well
then she would in theory only get that percentage of the twenty two million in
gains that her stock options represent or eight point two five million bucks
but with golden parachutes like full vest on change of control while she's [Man parachuting]
guaranteed the full payout of that twenty two million dollars
yes it's an enormous amount of money often way more than what star pro
athletes earn when money rains down in buckets in the locker room after a tough [Man taking a shower]
game they've just won you know in a different kind of shower