As a co-founder and co-owner of a new tech company, what five key terms and conditions should you include in your employment contract to safeguard against unjust or unethical termination by the company’s board of directors?
The first provision I’d focus on is a severance package. Specify a comprehensive severance package that would be provided in the event of termination. This could include a continuation of salary for a specified period, benefits, and potentially equity vesting acceleration. This term helps ensure financial security if the termination occurs.
The second item to consider is to clearly define what constitutes “cause” for termination. This definition should be specific and include things like gross misconduct, violation of company policy, or failure to perform duties. A narrow definition of cause helps protect against arbitrary or unfair termination.
Third, I’d focus on the notification period. Make sure to include a requirement for a reasonable notice period before termination, allowing you time to address any issues that might be cited as reasons for potential termination. This term can provide a buffer against sudden, unexpected dismissal.
Fourth, include a dispute resolution mechanism. Establish a clear dispute resolution process in case of disagreements between you and the board regarding termination. This might include mediation or arbitration steps before any final decision is made, providing a chance to resolve issues amicably.
And fifth, incorporate a non-disparagement clause into your employment agreement. This ensures that both parties refrain from making negative statements about each other post-termination. This helps protect your professional reputation and future career prospects.
Now, with the above five items in mind, there’s a sixth provision I’d recommend to protect yourself from being removed by one or more disgruntled board members. It’s called a supermajority voting requirement for termination.
This provision would require that any decision to terminate your employment must be approved by a supermajority of the board of directors, rather than a simple majority. A supermajority typically means a higher threshold, such as two-thirds or three-quarters of all voting members, must agree to the termination.
This type of clause can provide significant protection against arbitrary or capricious termination decisions, as it requires a larger consensus among board members. It is particularly useful in situations where you might have a few board members who are not in favor of your leadership or direction, as it prevents a small group from being able to unilaterally make a termination decision.
However, it’s important to note that Supermajority Voting Requirement provisions may have downsides. They can potentially create tension or conflict within the board if a significant minority of members are consistently overruled by this higher voting threshold. Additionally, investors or other board members might be hesitant to agree to such a clause, as it can be seen as limiting the board’s ability to make necessary leadership changes.
When it comes to new founders of new companies, another step founders should consider includes establishing what’s called a Founder’s Agreement.
Apart from an employment agreement, a separate founder’s agreement among co-founders can outline additional terms regarding decision-making, dispute resolution, and what happens in the event of a disagreement or a move to push a founder out.
A founder’s agreement can include several key provisions:
First, clearly outline how ownership and equity is divided among founders. This includes not only the percentage of ownership but also how equity may change over time, such as through vesting schedules and conditions under which equity can be bought back by the company.
Next, define each founder’s role in the company, including job titles, responsibilities, and expectations. This helps in setting clear boundaries and understanding of each founder’s contribution to the company.
Along the same lines, make sure to detail, in writing, how decisions will be made, including day-to-day management decisions and major decisions like fundraising, mergers, or exits. This might include voting mechanisms or conflict resolution strategies.
In your founder’s agreement, also define the handling of departures. By this I mean specify what happens if a founder leaves the company, whether voluntarily or involuntarily. This could include details on how their equity is handled, any non-compete clauses, and whether they retain any decision-making power.
Just like the employment agreement, having a solid dispute resolution provision in your founder’s agreement is important. Make sure to establish a process for resolving disputes among founders. This could include mediation, arbitration, or other methods to handle conflicts without resorting to legal battles.
And last but not least, outline any agreed-upon salaries, bonuses, or other compensation for the founders while also clarifying the ownership of intellectual property created by the founders, both prior to and during the company’s operations. Being specific with intellectual property rights is crucial to prevent future disputes over technology or product ideas.
When all is said and done in business, the bottom line is that a well-crafted employment agreement and founder’s agreement provide a clear framework for roles, responsibilities, and dispute resolution, thereby safeguarding the interests of founders and ensuring smooth operational governance. These agreements also help in mitigating risks of arbitrary decisions, such as unfair termination, and ensure clarity in equity distribution and decision-making processes within the company.
If there’s one thing I’ve learned over the last 30 plus years of practicing law and serving as a private mediator, is that maintaining open communications and a positive relationship with the board is always the best way to prevent conflicts that might lead to issues and termination. Usually, but not always, it’s only when trust breaks down that these other documents and provisions come into play.
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