Employment Contracts

Employment Contracts

🔖 Contents on this page:

📝 Purpose of contracts

A written and executed employment contract is invaluable to both the start-up and the employee as it puts the agreement between the parties in writing and gives the parties a clearer understanding of their duties, responsibilities and obligations in their employment relationship.

✅ Typical content for a contract

The employment contract should contain at least the following provisions:

  • Scope of employment: Every employment contract should include a job description specifying the employee's duties. This provision should specify whether the worker may be demoted, transferred to a position with different responsibilities, or have his/her existing responsibilities changed or expanded.
  • Remuneration: The remuneration clause lists basic salary, bonus payments and, if applicable, stock options. Lower than market standard base salaries are common at most start-ups. Other benefits make for a more attractive job offer, and can often sway a potential employee where salary alone cannot. Start-ups often compensate with stock options – or outright equity – to high-level employees. The stock options/equity should be granted according to a vesting schedule with a one-year cliff before the employee can begin to realize any equitable benefit. If you’re offering equity, consider including a tax distribution to cover the employee’s additional taxes as a result of receiving the benefits. It is a good idea to play with the salary and stock tool https://angel.co/salaries or research salary ranges at specific companies on Glassdoor. Compensation must be in line with the minimum wage laws of the country in which the company operates. Typical elements of investor due diligence include bogus self-employment when working with freelancers and vesting provisions for options/equity positions as well as appropriate good and bad leaver provisions. Especially for founders and employees with larger equity stakes, it is important to establish clear vesting rules and a clawback provision for equity in case of termination for cause.
  • Term and termination: Most employment contracts of start-ups contain an indefinite term with a notice period of 1-3 months and a probationary period of 3-6 months (with a short notice period). It is important to develop a clear understanding of the grounds for termination, especially termination for cause. "Hire slow and fire fast". Managing the growth of a start-up and hiring the right people are among the biggest challenges in running a start-up. Hiring slowly means hiring with clear intention, not reacting. Be clear about what your needs and expectations are. Write a clear job description and define the skills and attributes needed for long-term success, not just the immediate issues at stake. Firing quickly means that we can tend to give someone plenty of forgiveness and time and hope that things will work out. It is hard to make the decision that things are not working out and that it is time to part ways. If you or the employee made a mistake when you hired them, firing them quickly means addressing the problem head on and having difficult conversations.
  • Non-competition: "Non-compete" clauses are very common in employment contracts to prevent an employee from accepting a job with a competitor of the employer, investing in a competitor or starting a competing business during the employment relationship and for a certain time thereafter. The non-compete must be reasonable in time and geographic scope to be binding; a conservative non-compete might last for two years after employment.
  • Non-solicitation: The non-solicitation provision is an extension of the non-compete. It prevents an employee from soliciting, discussing, or accepting employment for competing business from another agent or employee of the employer.
  • Work for hire: This provision states that an employee who creates products, methods, or any other work that is ripe for intellectual property protection as part of employment automatically assigns ownership to the employer. In this way, the employer owns the creation and the underlying intellectual property at the outset. An important aspect of the investor due diligence is to make sure that all IP belongs to the company and not to an individual within the company.
  • Best efforts: A best efforts provision reaffirms the employee’s dedication to benefiting the employer and devoting his or her full attention to business during work hours.
  • Confidentiality: Often an employee will need to be briefed on confidential or sensitive information in order to perform his or her work. Under a confidentiality agreement, the employee promises never to disclose this information to an outsider and to take reasonable steps to prevent inadvertent disclosure. This type of provision usually lasts well beyond the employment itself, in perpetuity unless and until the information itself ceases to become secret.

📚 Useful resources

Good tools for sample contracts: