This article is from the Fall/Winter 2013 edition of the Nonprofit Quarterly, “Networks & Leadership: Emergence and Transitions.”
When the founder or longtime executive of a nonprofit leaves an organization, the board often grapples with how to say goodbye and thank you. This question is loaded with complexities—feelings and relationships come into play, as do financial, legal, and reputational risks and rewards. There is a range of motivations for considering an exit agreement, some quite compelling. The executive, for instance, may seek a financial acknowledgment that he or she has skillfully led the organization over a long tenure—and maybe for a salary well below market rate. Still, actions that might have strong support within the board and meet the needs and expectations of the executive might not play well with the IRS, a state attorney general, or in the court of public opinion.
This article is intended to offer readers a context and a set of choices in considering whether an exit agreement is needed and, if so, what might be included. Because this is a relatively new area of exploration for the sector, each situation brings unique features, and broad generalizations aren’t possible. What we offer here is a framework for:
- Distinguishing between different types of agreements, and when and how they are best used (e.g., an employment agreement, a separation agreement, or an exit agreement);
- Sharing case experience about the presenting situations where an exit agreement may be appropriate and the key considerations in exploring and shaping such an agreement;
- Understanding the legal and risk management questions that require attention in considering an exit agreement; and
- Providing an introduction to additional resources that may be helpful in considering this topic.
Whatever elements you end up putting in your exit agreement, we must stress the importance of seeking legal review of any draft exit agreement by an attorney who is licensed in the state where your nonprofit is located and also well versed in nonprofit law and IRS regulations. As you will see below, it is no simple task to construct an agreement that meets the noble goals of the agreement, protects both parties, and conforms to the myriad laws and regulations governing its terms. Professional advice is recommended.
Perspectives on Exit Agreements
Our writing team comes at this article from two perspectives. Two of us are leaders in developing an approach to successful executive transitions for the sector, and one of us is a thought leader in the field of nonprofit risk management, helping boards and executives better understand the consequences of risk taking and the legal and other risks that arise from governance, strategy setting, and operations. An unshakeable tenet of successful executive transitions is the following simple fact: to have a good beginning with a new executive, it is important to have a good ending with the departing executive. Too many transitions become strained because of lack of attention to what comprises a good ending for an executive—particularly a founder or long-tenured leader.
Clients regularly ask us for help in drafting exit agreements with departing executives. (For purposes of this article, we will use “founder,” “CEO,” and “long-tenured executive” interchangeably, to mean an executive who has had a major role in shaping an organization, either in its founding and long tenure or through leadership during a long tenure.) An exit agreement, as discussed in this article, differs in several respects from a separation agreement and release. (For information on the latter type of contract, please see the sidebar, below.) How many departing executives receive an exit agreement and what the terms are generally are unknown. The terms of these agreements are considered confidential, and unless a party to the agreement intentionally or inadvertently violates the confidentiality provisions in a typical agreement, they are not available for inspection. In our experience, only a small percentage of CEO departures are governed by the terms of an exit agreement. The use of exit agreements occurs most often under circumstances that we will describe below. Most are drafted by an attorney working with an executive, a few board leaders, and perhaps an accountant who specializes in nonprofit compensation and law. In some cases, the CEO and the nonprofit retain separate legal counsel during the negotiation of an exit agreement.