ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL
From: Bernard Crawford To: Aaron Whitfield ; Lisa Murakami Cc: Devon Archer ; Nadia Petrov Date: Wednesday, July 20, 2022, 3:47 PM EDT Subject: Elliston COO Hire — Initial Strategy Memo and Term Sheet Review
Matter Reference: Calderwood & Harkness Matter No. 1010-00004 / Client No. 81-30294
Aaron, Lisa —
Thank you both for circulating the internal term sheet on July 18 for the proposed hire of Dr. Marcus J. Elliston as Chief Operating Officer. Devon Archer and Nadia Petrov have completed an initial review, and I wanted to provide our strategic observations, flag certain compliance issues, and outline next steps before our team begins drafting the agreement package.
I've organized this memorandum by topic area for ease of reference.
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**1. Overview of Proposed Terms — Observations**
The term sheet proposes Dr. Elliston as COO reporting directly to CEO Priya Chandrasekaran, with a proposed start date of November 1, 2022. The initial 3-year term with automatic 1-year renewals (subject to 90-day non-renewal notice) is standard for C-suite hires at PE-backed portfolio companies, and we see no issues with that framework.
As a threshold matter, because AHT is a Delaware corporation headquartered in Massachusetts, the employment agreement will be governed by Massachusetts law, with Delaware corporate law governing equity-related matters. This dual-jurisdiction framework has some practical implications that we address throughout this memo.
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**2. Compensation Structuring Recommendations**
**Base Salary — $575,000/year.** This is competitive for a COO at a healthcare IT/SaaS company of AHT's size (approximately $127.4M FY2021 revenue, ~620 employees). We recommend confirming alignment with the Broadleaf Compensation Advisors peer benchmarking report completed in June 2022. Aaron, could you let us know whether Diane Holbrook's team provided a specific range for the COO role? That data point will be helpful in the event Fielding & Rowe pushes back on any element of cash compensation.
**Annual Bonus — 75% target ($431,250), 150% maximum of target ($646,875).** We have several recommendations here:
- The agreement should clearly define performance metrics and the Board compensation committee's discretion in determining bonus payouts. - The maximum bonus payout of $646,875 (i.e., $431,250 × 150%) should be capped explicitly in the agreement — not left to inference from a formula. - **Massachusetts Wage Act flag:** Bonus structures must be carefully drafted to avoid classification as "wages" that would be subject to treble damages under M.G.L. c. 149, §§ 148–150 if not timely paid. The distinction between discretionary and earned bonus compensation is critical under Massachusetts law. Devon Archer will prepare a separate memo on this issue.
**Signing Bonus — $250,000 with 24-month clawback.** The clawback applies on voluntary resignation or termination for Cause within 24 months. Two points:
- We recommend defining the repayment mechanics clearly in the agreement — specifically, whether repayment is required in a lump sum or on a pro-rata basis that decreases over the 24-month period. Pro-rata is more common in the current market and more readily enforceable. - We should anticipate that Catherine Fielding and her team at Fielding & Rowe will push back on the breadth of the Cause definition as it relates to clawback triggers. They will likely seek to narrow the circumstances under which the clawback is activated — particularly with respect to any subjective or cure-dependent components of the Cause definition.
**First-Year Total Cash Compensation at Target: $1,256,250** ($575,000 base + $431,250 target bonus + $250,000 signing bonus). This is a meaningful package and will set the tone for severance negotiations. Dr. Elliston's counsel will use this figure as the baseline for arguing higher severance multiples, so we should be deliberate about how we frame severance from the outset.
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**3. Equity Awards — Preliminary Analysis and Tax Coordination**
The term sheet contemplates two equity grants:
- **Stock options:** 1.25% of fully diluted AHT equity, vesting over 4 years (25% cliff at 12 months, monthly thereafter), exercise price at FMV as of grant date. - **RSUs:** 0.50% of fully diluted AHT equity, vesting over 3 years (33.33% annually).
Both grants will be made under the AHT 2020 Equity Incentive Plan (as amended May 2021). We recommend the following:
- **Plan capacity review:** Sandra Okafor, our Corporate/M&A counsel on the team, should review the plan's share reserve and outstanding awards to confirm sufficient capacity for these grants. If the plan is approaching its authorization limit, a plan amendment or Board reserve increase may be needed before grant. - **Stockholders' Agreement review:** We also need to review the Ridgeline Capital Partners Stockholders' Agreement for any consent requirements from Ridgeline or Helix Ventures Fund III, LP regarding equity issuances. Helix holds approximately 14% of fully diluted equity and may have anti-dilution or consent rights that would need to be addressed.
**Key Recommendation — Section 409A Tax Coordination:** We strongly recommend engaging Gregory Tan, our Tax partner, to analyze Section 409A compliance for the equity awards and deferred compensation elements of the package. Specifically:
- Stock options must be granted at no less than FMV to qualify for the Section 409A stock rights exclusion. Given that AHT is a private company, a contemporaneous 409A valuation will be necessary. - RSU settlement timing needs careful structuring — particularly if AHT were ever to become publicly traded, which would trigger specified-employee six-month delay rules under Section 409A. - The signing bonus clawback and severance payment timing must comply with 409A's requirements for separation-from-service payment triggers.
Gregory's rate is $1,100/hour, and his involvement was contemplated in the fee estimate range of $85,000–$125,000 set forth in our engagement letter. We will coordinate his work to minimize duplication.
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**4. Severance and Change in Control Provisions**
This is the area where we expect the most substantive negotiation with Fielding & Rowe.
**Termination Without Cause / Resignation for Good Reason (No Change in Control):**
The term sheet proposes:
- 12 months base salary continuation ($575,000) - Pro-rata annual bonus for the year of termination - 12 months employer-paid COBRA (estimated ~$2,150/month × 12 = $25,800) - Acceleration of 25% of unvested equity
Total estimated cash severance value (excluding equity): approximately $1,032,050 (using target bonus as a proxy for the pro-rata bonus calculation). This is within market range for a COO at a company of AHT's profile.
**Change in Control Severance:**
The term sheet proposes a double-trigger structure — termination without Cause or resignation for Good Reason within 24 months following a change in control — with the following benefits:
- 24 months base salary ($1,150,000) - 2× target bonus ($862,500) - 18 months employer-paid COBRA ($38,700) - 100% acceleration of all unvested equity
Total estimated CIC cash severance value (excluding equity): $2,051,200.
**Change in Control Definition — Critical Issue:** We recommend the following approach to the definition:
- **Ridgeline carve-out:** Ridgeline Capital Partners and its affiliates must be carved out from the acquisition trigger. Ridgeline currently holds approximately 68% through Fund IV, and any intra-fund transfer, recapitalization, or secondary sale among Ridgeline-affiliated vehicles should not constitute a change in control. - **Standard triggers should include:** (i) acquisition of more than 50% of voting securities by a non-Ridgeline person or group; (ii) merger, consolidation, or asset sale where existing stockholders retain less than 50% of voting power; (iii) liquidation or dissolution; and (iv) change in Board majority composition (excluding changes resulting from Ridgeline's existing nomination rights).
Devon Archer is preparing a detailed memo on change in control provision design and market analysis, which we expect to have ready by the end of next week.
**Section 280G "Golden Parachute" Exposure:** The CIC severance package may trigger Section 280G/4999 excise tax issues. We recommend a **"best-net" cutback provision** — reducing payments only if the Executive would be better off on an after-tax basis with a reduced payment than with the full payment plus the 20% excise tax — rather than a full tax gross-up. Gross-ups have become strongly disfavored in the market (even at PE-backed companies) and carry significant cost exposure for AHT.
Gregory Tan and Nadia Petrov will prepare a detailed 280G modeling analysis once compensation figures are finalized. We will also need to coordinate with Malcolm Sinclair at Hargrove & Sinclair CPAs, AHT's tax advisors, on the base amount calculations.
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**5. Restrictive Covenants — Massachusetts Compliance**
This area requires particular attention given the Massachusetts Noncompetition Agreement Act (M.G.L. c. 149, § 24L).
**Non-Competition (18-Month Post-Termination):**
The term sheet proposes an 18-month post-termination non-compete. While the Massachusetts Noncompetition Agreement Act permits non-competes of up to 12 months (or up to 24 months in cases involving breach of fiduciary duty or theft of property), the practical and legal default for new executive hires is 12 months. Our recommendation is to start at 18 months in the initial draft but to expect Fielding & Rowe to negotiate this down to 12 months — and to be prepared to concede that point in exchange for other terms.
**Garden-Leave Pay — Mandatory Compliance Element:**
The MA Noncompetition Agreement Act requires either garden-leave pay of at least 50% of the employee's highest annualized base salary within the preceding two years, or other mutually agreed consideration. At a $575,000 base salary, this means a garden-leave payment of at least $287,500 during the restricted period. This is a mandatory compliance element and cannot be omitted or waived by the employer. We will need to structure the agreement to clearly satisfy this requirement — and to address the interplay between garden-leave pay and any severance payments that may be owed concurrently.
**Non-Solicitation of Employees (18 Months, Manager Level and Above):**
Employee non-solicitation covenants fall outside the scope of the Noncompetition Agreement Act and are governed by Massachusetts common law. We will draft this provision to satisfy reasonableness standards, including appropriate limitations on scope and duration.
**Non-Solicitation of Customers/Partners (12 Months):**
Limited to customers and partners with whom the Executive had material contact during the last 24 months of employment. This is a standard and enforceable formulation.
**Confidentiality/NDA:**
Perpetual obligation, with standard carve-outs for legally compelled disclosure, publicly available information, and information independently developed or received from third parties. Generally enforceable under Massachusetts law.
**Invention Assignment:**
Standard assignment of all intellectual property developed during employment relating to AHT's business or using AHT's resources. We will include a Schedule A for Dr. Elliston to disclose any prior inventions from his time at Pinnacle Care Systems, consistent with Massachusetts law requirements.
Nadia Petrov is preparing a detailed MA Noncompetition Agreement Act compliance checklist, which we will share with you before finalizing the draft.
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**6. Anticipated Negotiation Dynamics**
Dr. Elliston is represented by Catherine A. Fielding at Fielding & Rowe LLP (101 Federal Street, Suite 2600, Boston, MA 02110), with Jonathan M. Pryce as the working associate. Fielding & Rowe is a well-regarded employment-side firm — we should expect sophisticated and thorough markups.
**Key Leverage Points for AHT:**
- Dr. Elliston is currently SVP of Operations at Pinnacle Care Systems in Rockville, MD. The COO title and direct reporting line to CEO Chandrasekaran represent a significant step up in scope and visibility. - The equity package (1.25% options + 0.50% RSUs = 1.75% of fully diluted equity) is meaningful given Ridgeline's 2019 take-private at approximately $340M enterprise value and AHT's growth trajectory since then. - AHT's Board Chair, Thomas Glenwood (Ridgeline's Managing Partner), is supportive of the hire, which means Board-level approval of the package should be achievable. However, the compensation committee — which includes two Ridgeline designees — will need to formally approve the terms, so we should ensure the package aligns with their expectations.
**Anticipated Pushback from Fielding & Rowe:**
- **Good Reason definition:** Expect requests to broaden the triggers to include material diminution in responsibilities, relocation beyond a specified radius, and changes in reporting structure (e.g., interposition of an additional reporting layer between Dr. Elliston and the CEO). - **CIC severance:** Expect a push to increase CIC severance multiples or to replace the best-net cutback with a full tax gross-up. - **Restrictive covenants:** Expect significant pushback on the non-compete — particularly scope, duration, and the definition of "competing business" or industry vertical. - **Signing bonus clawback:** Expect efforts to exclude certain involuntary termination scenarios (e.g., termination without Cause) from the clawback trigger.
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**7. Precedent Templates**
Wentworth & Gage LLP (Richard D. Gage) has provided AHT's existing employment agreements for CEO Priya Chandrasekaran and CFO Derek Solano, which we will use as precedent templates to ensure consistency across the C-suite. We have also received the AHT 2020 Equity Incentive Plan (as amended May 2021), the Amended & Restated Certificate of Incorporation (Delaware), the Amended & Restated Bylaws, and the Ridgeline Capital Partners Stockholders' Agreement.
Aaron — could you confirm whether there are any other background documents you'd like us to review? We would find it particularly helpful to have any prior Board compensation committee resolutions regarding executive compensation, as well as any materials from Broadleaf Compensation Advisors (including the peer benchmarking report and any specific COO compensation range recommendations) that could inform the drafting.
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**8. Next Steps and Timeline**
We propose the following workstreams and target dates:
1. **Nadia Petrov** — MA Noncompetition Agreement Act compliance checklist (target: **July 25**) 2. **Devon Archer** — Change in control provisions design memo and market analysis (target: **July 28**) 3. **Devon Archer** — MA Wage Act memo regarding bonus/compensation classification (target: **August 1**) 4. **Calderwood & Harkness** — Delivery of first complete draft package to Fielding & Rowe, including Employment Agreement, Non-Competition Agreement, equity award agreements (stock option and RSU), schedules, and exhibits (target: approximately **August 5, 2022**) 5. **Sandra Okafor** — Review of equity plan capacity and Stockholders' Agreement consent requirements (target: **August 10**) 6. **Gregory Tan** — Section 409A analysis, to commence once equity terms are confirmed
Before we begin drafting, we would like to schedule a call with both of you early next week to discuss strategy and confirm the company's priorities on the key negotiation points outlined above. Please let us know what day and time would work — we are flexible throughout the week.
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We are available to discuss any of the foregoing at your convenience. The full team — Devon, Nadia, and I — can be reached any day next week for a call.
We look forward to working with you on this matter.
Best regards,
**Bernard Crawford** Partner, Labor & Employment Calderwood & Harkness LLP One International Place, Suite 3400 Boston, MA 02110 Direct: (617) 555-4218 Email: bcrawford@calderwoodharkness.com
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