6 exit agreement considerations

Nonprofit leaders like to recognize the contributions of founders or executives who have enjoyed a long and happy relationship with the organization. Very often this is done with an exit agreement, a way to reward someone who has played a significant part in the groups’ success.

Such a thing is praiseworthy. But when the nonprofit is overextended, providing that reward could get the organization into difficulty. In “Exit Agreements for Nonprofit CEOs: A Guide for Boards and Executives” that appears in the Fall/Winter 2013 issue of The Nonprofit Quarterly” Tom Adams, Melanie Herman and Tim Wolfred suggest that the following should be key considerations in drafting exit agreements:

  • Financial Capacity. The organization must have the reserves or ability to raise designated funds for the purpose of the exit agreement so as not to impede further capacity to carry out mission.
  • Private inurement risk. Government regulators focus sharply on this, and they will act quickly if they suspect impermissible transfer of assets from a charitable organization to insiders or unqualified persons.
  • Stakeholder dismay. Donors might frown on such an agreement.
  • Contractual considerations. The risk of a breach of contract claim arises any time an organization enters into a contract with another party.
  • Disclosure to incoming CEO. Any incoming CEO will be aware of all contracts and might expect a similar set of benefits.
  • Internal equity. There could be a question of whether the proposed agreement is so out of character as to raise serious internal equity and morale issues.