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Put it in writing: Mitigating risk through employment agreements

It’s not uncommon to hire informally in the early days of a startup—after all, written employment agreements aren’t legally required. Although the document isn’t compulsory, it’s an opportunity to protect your business in more ways than one. If you aren’t using written employment agreements yet, now is the time to start.

There are three fundamental components founders should think about when it comes to enforceable employment agreements.

1. Make sure it’s written down.

You can have an employment agreement that isn’t written down, but putting it in black and white means everyone involved knows exactly what they are agreeing to. Plus, a verbal agreement stands little chance of being enforced if the employment relationship deteriorates. Take the time to put it in writing.

2. Define the term.

In most cases, people are hired for an indeterminate length of time—there is an expectation that the employee will stay on until they resign or are terminated. But if you are looking for a shorter period (such as a project or term contract), be clear about what the length of employment is meant to be.

3. Start with the end in mind.

Relationships in employment, just like other relationships, can go south from time to time. Putting the effort into writing a detailed termination clause can save you a lot of pain at the end of the relationship by defining exactly what the company owes and what an employee is entitled to under certain circumstances. (Have a lawyer review the agreement, because it’s easy to mess it up and have it considered invalid.)

What else do I need to know about employment agreements?

Address all forms of compensation

Like all aspects of managing the employment relationship, being clear about all forms of compensation is preferable. You have an opportunity to set out the compensation terms in writing, so why wouldn’t you? Ensure the employee can see everything they are signing up for. Outline base pay and any variable pay components, including objective criteria for earning variable pay.

When it comes to equity compensation, such as stock options and shares, it is important to address what happens to equity rights at the end of employment. The bottom line: If you feel your equity compensation has value, you should protect it with an employment agreement you feel confident in, as significant disputes can arise.

If you don’t have the details of your equity program worked out yet, you have the option of making your intentions known in the employment agreement. Putting your intentions on record can give the employee some comfort. Just make sure you follow through, and don’t wait too long.

Provide clarity on expectations

It’s in everyone’s best interests that you make things as clear as possible from day one. It can’t hurt to include details on company-specific policies, and in fact, it can help you down the line. If you have policies that are fundamental to your business, consider referencing them in the agreement, along with the expectation that employees follow the policies. That way, no one can say they didn’t know. (It’s good practice to also provide training on your policies.)

Cover all the bases

We don’t like to think about departing employees behaving in an unscrupulous manner, but it does happen. Consider including restrictive covenants around confidentiality, non-competition and non-solicitation to govern post-employment behaviour. It’s also a good idea to think about intellectual property assignments to ensure disputes over moral rights don’t arise during, or at the end, of the employment relationship.

Make sure it counts

The courts do not look favourably upon retroactive employment agreements, so make sure they are always signed and executed before new hires start work. At the very latest, have your agreements signed on day one, before employees do anything else. If you don’t do that, an employment agreement is no longer enforceable—it doesn’t count at all.