Employment Essentials

Few would consider employment agreements as exciting or cutting-edge as other technology contracts.

Yet they can be critical for an entrepreneur's protection during times of change. For example, an employment agreement can define what rights the founder keeps to grow the business after he sells control, or attracts investors.

This is particularly important in earn-outs, where the price depends on the profitability of the business after the sale. But if the executive doesn't have authority over the budgets, hiring and decision-making that affect that profitability, he or she won't want his compensation to depend on it either.

Just as importantly, the company should not be able to change that authority unilaterally, without the executive's consent. Otherwise, the earn-out is at the mercy of every change of corporate control or of senior executive.

Employment Contract = Protection

Even before funding, an employment agreement helps protect against the executive's own partners. While everyone may get along at the start of a business, differences of opinion arise naturally. Then, a strong employment agreement may lead to discussion, rather than a split – or to a quicker and more favorable buyout.

At the other end of the startup lifecycle, many survivors of failed dot-coms are now seeking more conventional positions. For them, an employment agreement smoothes their return to traditional business culture.

When negotiating an employment agreement, however, many executives mistakenly focus only on the compensation package. That tunnel vision blinds them to many key provisions that will affect whether they will ever be able to earn it.

Begin with that same compensation section, for example. While the amount of salary and benefits is certainly important, so are details about when it will be paid, and by whom.

A contract with the new subsidiary of a global firm doesn't have the large firm's backing without a guarantee. The new venture may not be able to pay the contract if its business fails, or if compensation is deferred far into the future.

No one should be shy about asking for perks. Company-provided amenities, or the right to buy them with pre-tax dollars, quietly expand a salary.

Similarly, equity options set the base for wealth accumulation. A board seat can often provide a generous stipend, as well as insight and influence over the business.

Non-compensatory Provisions

But the most critical legal parts of an employment agreement are found in sections other than compensation.

For example, without contractual commitments to the job conditions the employee expects, he or she could quickly find him- or herself unhappy if senior management or ownership changes. Even worse, he or she could be forced out, involuntarily and without severance, by a transfer to an unwanted position ' such as opening a new sales office, solo, in Northern Idaho.

Therefore, the description of “executive” job duties should cover everything the executive considers important. The contract should specify not only the authority given to the executive, but also the location the employee prefers, precisely to whom the employee will report and even the staff support he or she will receive to do the job.

The termination section deserves the most attention, however. If possible, the employee should insist that removal is an option only if he or she fails to meet objective standards ' for job related performance. Prior written notice of the claimed problem ' and an opportunity to fix it before being fired ' is only fair, and usually granted.

In contrast, management often insists on a right to fire for generally unsatisfactory performance. Employees should instead require a violation of specific rules, or risk being fired over the slightest business downturn, or at the employer's discretion. Even the right to fire for commission of crime ' which is rarely challenged ' should be restricted to conviction of a felony that affects the performance of job duties.

Employers, of course, prefer no limits on their “at will” right to fire at any time and for any reason. Employees can sometimes also get the right to “get out” of a bad contract, if the employer doesn't do what it originally promised.

A well-written agreement will also cover specific effects of termination.

For example, salary or benefits may continue, other than after a criminal conviction, if everyone knew at the start of the risk of premature termination from a difficult position. Severance payments and golden parachutes provide the same protection.

Finally, the “fine print” also hides several key sections. A narrow assignment clause prevents the employee from being forced to work with new owners he may not prefer.

A strong indemnity, although very technical, forces the employer to pay legal fees and damages awards if the employee is sued over job performance. Be sure it survives termination of employment, since suits can be filed long after a job ends.

The employment agreement may not be the most exciting document facing an executive. Yet it may be the one that has the most practical effect on both working life, and what the employee takes home. While employers will try to resist concessions, an executive may win rights if that is what it takes to get hired.

Few would consider employment agreements as exciting or cutting-edge as other technology contracts.

Yet they can be critical for an entrepreneur's protection during times of change. For example, an employment agreement can define what rights the founder keeps to grow the business after he sells control, or attracts investors.

This is particularly important in earn-outs, where the price depends on the profitability of the business after the sale. But if the executive doesn't have authority over the budgets, hiring and decision-making that affect that profitability, he or she won't want his compensation to depend on it either.

Just as importantly, the company should not be able to change that authority unilaterally, without the executive's consent. Otherwise, the earn-out is at the mercy of every change of corporate control or of senior executive.

Employment Contract = Protection

Even before funding, an employment agreement helps protect against the executive's own partners. While everyone may get along at the start of a business, differences of opinion arise naturally. Then, a strong employment agreement may lead to discussion, rather than a split – or to a quicker and more favorable buyout.

At the other end of the startup lifecycle, many survivors of failed dot-coms are now seeking more conventional positions. For them, an employment agreement smoothes their return to traditional business culture.

When negotiating an employment agreement, however, many executives mistakenly focus only on the compensation package. That tunnel vision blinds them to many key provisions that will affect whether they will ever be able to earn it.

Begin with that same compensation section, for example. While the amount of salary and benefits is certainly important, so are details about when it will be paid, and by whom.

A contract with the new subsidiary of a global firm doesn't have the large firm's backing without a guarantee. The new venture may not be able to pay the contract if its business fails, or if compensation is deferred far into the future.

No one should be shy about asking for perks. Company-provided amenities, or the right to buy them with pre-tax dollars, quietly expand a salary.

Similarly, equity options set the base for wealth accumulation. A board seat can often provide a generous stipend, as well as insight and influence over the business.

Non-compensatory Provisions

But the most critical legal parts of an employment agreement are found in sections other than compensation.

For example, without contractual commitments to the job conditions the employee expects, he or she could quickly find him- or herself unhappy if senior management or ownership changes. Even worse, he or she could be forced out, involuntarily and without severance, by a transfer to an unwanted position ' such as opening a new sales office, solo, in Northern Idaho.

Therefore, the description of “executive” job duties should cover everything the executive considers important. The contract should specify not only the authority given to the executive, but also the location the employee prefers, precisely to whom the employee will report and even the staff support he or she will receive to do the job.

The termination section deserves the most attention, however. If possible, the employee should insist that removal is an option only if he or she fails to meet objective standards ' for job related performance. Prior written notice of the claimed problem ' and an opportunity to fix it before being fired ' is only fair, and usually granted.

In contrast, management often insists on a right to fire for generally unsatisfactory performance. Employees should instead require a violation of specific rules, or risk being fired over the slightest business downturn, or at the employer's discretion. Even the right to fire for commission of crime ' which is rarely challenged ' should be restricted to conviction of a felony that affects the performance of job duties.

Employers, of course, prefer no limits on their “at will” right to fire at any time and for any reason. Employees can sometimes also get the right to “get out” of a bad contract, if the employer doesn't do what it originally promised.

A well-written agreement will also cover specific effects of termination.

For example, salary or benefits may continue, other than after a criminal conviction, if everyone knew at the start of the risk of premature termination from a difficult position. Severance payments and golden parachutes provide the same protection.

Finally, the “fine print” also hides several key sections. A narrow assignment clause prevents the employee from being forced to work with new owners he may not prefer.

A strong indemnity, although very technical, forces the employer to pay legal fees and damages awards if the employee is sued over job performance. Be sure it survives termination of employment, since suits can be filed long after a job ends.

The employment agreement may not be the most exciting document facing an executive. Yet it may be the one that has the most practical effect on both working life, and what the employee takes home. While employers will try to resist concessions, an executive may win rights if that is what it takes to get hired.