Five Best Practices for Executive Employment Agreements
Congratulations! You’ve just made a verbal offer to a rockstar executive. Even better, they want to join you on your startup’s journey. Boom! You’re all set, next stop is the moon, right? Wrong! When hiring an executive, it’s easy to get caught up in the excitement of a potential new team member. Enthusiastic about this new relationship, CEOs often overlook the necessity of creating secure, legally binding executive compensation plans and employment agreements. After all, with such promise and positivity ahead, what could go wrong?
Unfortunately, as with all things in startups, a lot of unexpected things can go wrong. That’s why it is critical for CEOs to draft smart, well-devised compensation plans and clear employment agreements. Then, your startup can grow with the peace-of-mind that everyone has a clear understanding of their employment—no matter what the future brings.
Execute an Employment Agreement for Every Executive
It’s in the mutual best interest of both the Company and individual executives to protect themselves from compensation-related disagreements by adding compensation and termination clauses into their initial contract. Whenever possible, these employment agreements should be entered into before the relationship officially begins. That being said, if you don’t have current signed employment contracts, you should remedy that immediately!
What should executive agreements include?
Executive agreements can take the form of an offer letter or a formal employment agreement
They include terms around compensation, equity, benefits, job offer conditions such as location and other important service terms
Agreements vary by company but these contracts are typically straight-forward and under five pages long—even for senior executives
All documents should be signed by the executive
Specify Compensation Terms and Conditions Clearly
Compensation terms and conditions are the most likely points of contention in the event of separation so it is critical to be as clear as possible:
Discretionary incentive pay plans provide the most flexibility for the employer. However, if a plan is non-discretionary, you need to be sure the agreement clearly sets all pay bonus or commission conditions including pay rate, key terms, incentive pay conditions, earning criteria, payment schedules, etc.
You should include a condition whereby executives must be employed at the end of an earnings period and/or on the incentive payment date to earn the payment. You should include a provision that allows the company to change annual targets to incentivize different behaviors from year to year
You should clearly lay out all equity grants and include any necessary board or committee approvals required, vesting framework, and any other rights
Executives should receive a copy of the equity plan and prototype agreement. If bespoke provisions are included, like acceleration terms, those should be very clearly stated
State Termination and Severance Conditions
If possible, you should specify an at-will employment relationship which gives the company the most freedom and flexibility. As a result, you will also need to ensure executives are properly covered in the event they are let go at no fault of their own.
Employers should build all severance-related language within the initial employment agreement
All severance benefits should be conditional based upon an executive signing a release of claims
Separation pay provisions should be structured such that separation pay is forfeited or reduced if the employee violates of any post-employment obligations
Protect Your Intellectual Property
Company executives—and preferably everyone working at the company—should sign a confidential information and invention assignment agreement within their employment contract.
State laws differ about exactly what this can entail so check with counsel on how the laws specifically apply to you
Noncompetition and/or non-solicitation provisions can be included in employee agreements (depending on state laws) ensuring company confidentiality
Specify within your agreements what the penalties are for breaking any confidentiality clauses; penalties can include termination and/or loss of severance-related benefits
Focus on Writing With Clarity and Simplicity
There’s admittedly a fine line between writing concise contracts and fully covering all of your bases and it is up to you as CEO to walk the line. You need to ensure all conditions and terms are explicitly agreed upon while also not creating a contract that’s overly complicated or difficult to interpret. You also need to stay in compliance with all your local laws and regulations. We hope you use these best practices as a framework to protect your startup while also providing clarity for a long term working relationship with your executives.
Special thank you to Christopher A. Carlisle and Megan Anderson of Gray Plant Mooty for contributing their expertise to this blog post.
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