A typical sign-on bonus language in an employment offer letter will state that an employee's compensation is to include a "one-time, discretionary sign-on bonus in the amount of $x". The most common issue relating to sign-on bonuses is related to repayment obligations.
To minimize the likelihood of disputes over repayment of a hiring bonus, employers should clearly outline their employees' repayment obligations in the offer letter. The following language can be used as a guideline: "Employee agrees to repay this bonus payment in full, shall he resign or be dismissed for cause prior to one-year anniversary of his employment with Company". This type of language protects the employer's right to repayment, and it also protects the employee on the other end of that agreement from having to repay the bonus, if he is terminated for insufficient performance, or some other reason lesser than serious misconduct or violation, or if that employee is simply laid off due to restructuring or reduction in force.
The problem with the above bonus repayment language from an employee's perspective is that he could potentially work for almost a whole year and then have to repay the bonus, just because they quit right before that one-year anniversary. To avoid this situation, an employee may request that the bonus repayment language be modified to include some type of pro-rata reduction in bonus repayment obligation. A typical arrangement can be as follows: an employee's sign-on bonus repayment obligation is to be reduced by 1/12 after each month employment.
The above terms are of course highly negotiable and the parties are free to agree on whatever bonus repayment terms they deem reasonable and acceptable. The important part is to clear about what these terms are and keep the above points in mind.
Like in most other business dealings, having a clear, well drafted equity contract regarding entitlement to company shares is very important in order to avoid all types of future disputes of who owes what to whom.
Here is a typical scenario, especially in the Bay Area start-up world: a young start-up engages in hiring discussions with an engineer or a marketing person. The employer is in a hurry to hire the right person to get their business up and running as soon as possible, and the candidate is also anxious to get hired. They begin discussing the details of that employee's equity rights. They go back and forth by email a few times, running numbers and percentages by each other, trying to reach an agreement. Then, as that employee comes on board and becomes focused on and consumed with his work, that conversation dies down for some time. It's not clear what they agreed upon if anything. Earlier, the start-up CEO might have promised to give that employee a formal equity plan as soon as possible but never followed through, getting caught up with dealing with a hundred other things that need to be addressed at a young company.
Then, one day that employee leaves the company for one reason or another. What equity is he entitled to, if the parties never signed any stock agreement? An employer cannot say that he doesn't owe that employee any equity. If there is some written communication regarding equity, then at the very least the employer usually owes that employee the lowest amount of equity they offered during those early negotiations. But how and when should that equity vest, and how and when can it be exercised? What about all the other relevant terms of equity grant? Absence of written agreement creates many such questions that can and often do lead to litigation, that could have been easily avoided if the parties had a clear, written agreement in place regarding equity rights and obligations.
Therefore, whether you are the employee who expects equity to be part of his compensation, or whether you are an employer who plans to compensate his employees in part with equity in your company - it's in your best interest to have a written and signed equity grant agreement in place as soon as possible.