Definition of Golden Parachute

What is a "golden parachute"? What is the definition of the term "golden parachute"?

Let's imagine for a second that XYZ is bought by another company. The acquiring company decides that the top executives of XYZ are no longer needed. To paint a picture in your head, let's imagine that the acquiring company pushes the top executives out an an airplane.

These executives are hurtling to the ground, no longer needed at the company that they helped to build. But wait! Golden parachutes are deployed, and they float comfortably to the ground.

A "golden parachute" is an employment agreement that promises lucrative benefits if a job is lost due to a takeover. A "golden parachute" could be given to anybody that is attached to a company, whether it be a key executive or a director.

Golden parachute clauses can be triggered in other circumstances (such as a certain percentage of the company's stock is acquired), but most golden parachute clauses are activated when a person leaves a company.

So, let's say that John Smith was the CEO of XYZ. He is fired after a takeover, but lucky for him, he has a "golden parachute" clause in his contract. This clause entitles Smith to $30 million in cash and a large number of shares in the new company.

For this reason, acquiring companies must carefully consider the value of all "golden parachute" clauses when determining the value of a potential target.

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