Golden Parachute

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