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Employment Agreements
SUMMARY: This checklist is intended to outline the major issues associated
with negotiating investor-executive employment agreements. Portions of
this list may not be applicable in particular circumstances and other
matters not on this list may need to be addressed.
1. Scope of Employment
a. What is the title of the Employee's job?
b. What are the Employee's responsibilities?
c. Can the Employee be demoted? Can Employee's responsibilities by substantially
modified, decreased, or increased?
d. Is Employee guaranteed a seat on the Board of Directors while an
employee?
e. Where is the place of employment?
f. Can Employee be relocated unilaterally to another city, or only with
the Employee's consent?
g. Is the Employee allowed to be involved in other activities (e.g.,
a directorship on other Boards, involvement in community activities)?
2. Salary
a. What is the base salary?
b. When is it payable?
c. Does the salary go up each year by a designated amount or by cost
of living increases?
d. Are there designated times for performance reviews?
3. Bonuses
a. Does Employee get a signing bonus?
b. Is Employee entitled to a guaranteed bonus?
c. Are the bonuses tied to objective performance standards?
d. Are target bonus levels or minimum bonuses to be established?
4. Benefits
a. Will the Employee participate in all benefit plans of the Company?
b. Which of these plans should be in place for the Employee? Are all
of the payments for the benefits the responsibility of the Company?
- Health and medical (including spouse and dependent coverage)
- Disability
- 401 (k)
- Pension
- Cafeteria Plan
- Life insurance
- Stock Option/Stock Grant
- Vision
- Dental
- Executive Financial Counseling
c. How much vacation per year is Employee entitled to? Does unused
vacation continue to accrue for the benefit of Employee and is it payable
on termination of employment?
d. Is there a designated sick pay policy?
e. Any special loans or forgiveness arrangements?
f. Are some of the benefits taxable to the Employee? Should Employee
be reimbursed for the tax?
5. Term and Termination
a. How long is the employment term?
b. Is the Employee given the right to terminate at the Employee's discretion
prior to the end of the term?
c. Does the Agreement get renewed automatically on a year-to-year basis
unless the Company gives the Employee notice of nonrenewal at least
ninety days in advance of the end of the term?
d. Is the employment "at will"?
e. What are the grounds, if any, on which employers can terminate?
f. What are the terms, if any, for compensation in the event of early
termination?
g. What are the circumstances under which the Employee can be fired
"for cause," such as:
- Conviction of a felony or any act involving moral turpitude;
- Commission of any act of theft, fraud, dishonesty or falsification
of an employment record;
- Material uncured breach of the Employment Agreement;
- Failure to perform reasonable assigned duties; and/or
- Improper disclosure of the Company's confidential information.
h. Employee needs to avoid situations which provide "for cause"
grounds that give the Company too much latitude for termination.
i. Is Employee entitled to severance pay on termination? How much?
j. If the Employee is terminated without cause, is it clear that Employee
will get all salary and benefits that Employee would otherwise have
been entitled to for the remaining term of the Agreement?
k. If terminated without cause, is the Company required to continue
paying for COBRA or other benefits for some period of time?
6. Reimbursement of Expenses
a. Will the Employee's business expenses be reimbursed promptly?
b. Is there a car or car allowance, cellular phone provided, or other
such amenities?
c. Are moving expenses to be reimbursed?
d. Is there a relocation package available for Employee (e.g., the Company
purchasing Employee's house on a move?)
7. Liability Protection for the Employee
a. Does the Company have Directors' & Officers' ("D&O")
insurance coverage? Is the Company required to maintain a minimum amount
of such coverage?
b. Do the Company Bylaws provide for indemnification protection for
officers, directors and employees?
c. Does the Company's Articles of Incorporation limit the liability
of officers, and directors to the maximum extent permitted by law?
d. Is there an Indemnification Agreement that protects the employee,
covering:
- Indemnification protection for claims
- Automatic advancement of legal expenses
- Protection even if the Employee is no longer employed by the Company?
(Note statutory limitations on indemnification.)
8. Stock Option Grants
a. Will Employee get stock options
b. What percent of the Company do the options represent? (Note: In venture
capital backed early stage privately held companies, the usual price
for Common Stock options is 1/10th of the price for the latest round
of Preferred Stock issuance.)
c. What is the exercise price for the options?
d. Are any options deemed automatically vested upon grant?
e. When will unvested options vest? monthly? yearly cliff vesting?
f. How long is the option exercisable?
g. Does the option exercise period terminate ninety days after termination
of employment or can it be longer?
h. Are the shares obtained upon exercise of an option subject to repurchase
on termination of employment? If so, at what price? (From the Employee's
perspective, repurchase rights should not be included or should be limited.)
i. Are the shares obtained upon exercise of an option subject to a right
of first refusal? If so, on what terms?
j. Is the option a tax advantaged Incentive Stock Option?
k. Does vesting on options accelerate on a change of control of the
Company? Upon the happening of other events such as termination of employment
by the Company without cause?
9. Stock Grants
a. Will the Employee be granted stock?
b. Is this stock subject to vesting? What is the vesting period?
c. Is this stock subject to repurchase rights or rights of first refusal?
d. Should Employee file an IRC 83(b) election?
e. Does vesting accelerate on a change of control of the Company? Upon
the happening of other event such as termination of employment by the
Company without cause?
f. Does Employee have to pay anything for the grant?
g. What tax will the Employee have to pay for the Grant? Will the Company
also pay Employee an amount to cover the tax?
h. Does Employee have a right of first refusal for future Company stock
issuances to avoid dilution?
10. Confidentiality Restrictions
a. What restrictions have been imposed on the Employee by the prior
employer?
b. The Employee must be careful not to use or divulge confidential information
of a prior employer. The new employer will often want a covenant from
the Employee prohibiting such use or disclosure.
c. If there are confidentiality restrictions on the Employee, are the
following excluded from the definition of "confidential information"?:
- Information that is or was publicly known, or which becomes publicly
known through no fault of Employee
- Information that is or was obtained from a third party who had the
right to disclose the information without restriction
- Information independently derived by the Employee without reference
to the confidential information
- Information that was already lawfully in Employee's possession or
within Employee's knowledge prior to the disclosure of the confidential
information
d. How long do the confidentiality restrictions last? Indefinitely?
A set number of years after disclosure to the Employee?
11. Invention Assignment Issues
a. What is the scope of the Company's rights to the Employee's development
of new inventions, trade secrets, and ideas? Do these belong to the
Company only if they specifically relate to Company business and developed
during Company time?
b. Do the invention assignment provisions comply with the state Labor
Code or other applicable law?
12. Breach of Agreement
a. Is the Company required to give notice to the Employee of any alleged
breaches of the Agreement and an opportunity to cure?
13. Disability and Death
a. What is a disability event?
b. What happens on disability? Does the Employee continue to receive
salary and benefits?
c. What happens on death? Can medical and other benefits continue for
some period for the spouse and children?
14. Post-Employment Limitations
a. Are there limitations on the Employee soliciting Company employees?
For what period?
b. Is there a covenant not to compete after termination of employment?
- For what geographic regions?
- For what period?
- How can the covenant be limited?
- Are the restrictions enforceable under applicable law? (Not permitted
in some states.)
15. Dispute Resolution
a. How are disputes to be resolved?
b. Should arbitration be considered?
c. In what city must disputes be brought if litigated or arbitrated?
16. Golden Parachute
a. In the event of a change of control of the Company, is Employee
entitled to terminate employment and receive a "golden parachute"
payment (e.g., two or three times the yearly salary)?
b. What are the tax implications of the golden parachute payment? Will
the Company also gross up the parachute payment to cover the tax?
c. Will the Company reimburse the Employee's expenses in connection
with an IRS audit claiming additional tax?
17. Representations and Warranties of the Company
a. Are there specific representations and warranties of the Company
that should be set forth (e.g., financial resources, venture capital
backing)?
b. Has Employee been promised something orally that should be reflected
in the Employment Agreement?
18. Miscellaneous Provisions
a. Is the Company prohibited from assigning the Agreement?
b. Is there an attorneys' fee clause where the prevailing party in a
dispute would be entitled to recoup its attorneys' fees incurred?
c. Choice of Law
d. Integration Clause
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