What are the main considerations for early-stage companies when establishing employment contracts for founders and initial employees?
Establishing robust employment contracts is a vital ingredient
for success. From visionary founders, to the early team members and
beyond, employment contracts serve as the framework for building a
thriving workforce.
Founders' employment terms
An employer should be clear about the founders' terms of employment and, most importantly, record these in writing. Written agreements provide certainty over the terms on which the founders (and other employees) are engaged and enable the employer to benefit from various protections that can be built into the contract.
Roles and responsibilities
Founders shoulder significant responsibilities; their roles and responsibilities should therefore be clearly articulated.
Roles can evolve swiftly and flexibility should also be incorporated to accommodate changes as the company grows. An exhaustive job description could inadvertently limit innovation as the company advances in response to industry shifts.
Where founders also act as statutory directors of the company, the contract should reflect their fiduciary director duties and emphasise their commitment to act in the best interests of the organisation.
Remuneration
Employers should pay employees (including founders) a salary of at least the national minimum wage, even when cash is tight. Failure to do so may lead to wage claims and enforcement measures being taken by HMRC, with penalties to the company and potential additional liability for officers and directors.
Clearly defining equity, bonus and other incentive arrangements may also be relevant for key employees – to maintain flexibility and navigate the difficulties associated with changing employment terms and conditions, the details and particulars of these arrangements may be set out in separate agreements.
Intellectual property
In an environment where intellectual property is often the cornerstone of success, the contract should clearly outline the ownership of work and innovations.
Contracts should specify that any work created during employment (so far as legally permissible) belongs to the company – for founders, protection should expressly extend to consideration of any valuable IP created before entry into the contract.
Confidentiality
Protecting confidential information and trade secrets is crucial. Employers should include robust confidentiality clauses, that extend indefinitely post-termination, to safeguard proprietary information.
Power of attorney
Power of attorney provisions grant specific powers to designated
individuals in the event that the founder is unable to act on
behalf of the company due to unforeseen circumstances.
This enables designated representatives to make critical decisions
in a founder's absence (for example, effect a founder's
resignation from directorship), preventing operational disruptions.
In order for a power of attorney to be valid, it (or the agreement
within which it is incorporated) must be executed as a deed.
Notice and termination
Notice and termination provisions should be clearly defined.
- Notice periods: Notice periods should provide sufficient time for the company to recruit a replacement and arrange any necessary handover of duties. An ability to pay in lieu of notice provides flexibility in terminating an employee's contract without being in breach of contract.
- Garden leave: Provisions for garden leave are invaluable in enabling an employer to manage employees during some or all of their notice period (where making a payment in lieu of notice is not appropriate); for example, by restricting their duties and access to premises during this period.
- Summary termination: Contracts should outline the circumstances under which termination without notice may occur – a summary termination clause should enable termination in a broad range of circumstances (for example, gross misconduct, negligence, bringing the company into disrepute, fraud or dishonesty, and bankruptcy).
- Return of company property: To safeguard the company's assets and intellectual property, including proprietary processes, it is essential to incorporate explicit provisions to ensure founders and other employees, upon their exit, promptly return any company-owned devices, documents or other materials in their possession. These provisions not only protect the company's interests but also facilitate a smooth transition for both parties.
A spotlight on restrictive covenants
Given the pivotal role founders play, it is vital to outline any restrictions on engaging in outside business activities during employment, ensuring that the founder's focus remains aligned with company objectives and preventing conflicts of interest that could compromise the organisation's success.
It is equally important to protect the business following termination. Post-termination covenants, such as non-compete provisions preventing key personnel from joining competitors immediately after departure, non-solicitation clauses protecting key relationships with suppliers and customers and non-poaching covenants protecting against staff moves, are critical. By restricting the activities of former employees, employers can seek to protect their trade secrets and confidential information, maintain stability and foster continuous growth.
However, post-termination restrictions in an employment context are notoriously difficult to enforce; careful drafting is essential. Covenants must go no further than is reasonably necessary to protect an employer's legitimate business interests. They should be tailored to each individual's role and strength of trade relationships, and how long it would take a replacement employee to build up trade relationships of a similar level to the one held by the departing employee. Importantly, the courts will assess the enforceability of covenants as at the date they are entered into; where roles and responsibilities change during employment, covenants should be reviewed accordingly.
In addition, the government has stated that it intends to legislate to limit the length of non-compete clauses to three months – while no legislation has been introduced as yet, employers should keep abreast of developments in this area, including on any change of government.
Osborne Clarke comment
Crafting employment contracts for early-stage companies requires foresight and adaptability. From founders shaping the vision to the early employees driving innovation, these contracts serve as the scaffolding for success.
With regard to timing, it is advisable to secure robust employment agreements for all employees and/or founders from day one of their involvement with the company. However, where such best practice has not or could not be followed at the outset (perhaps due to competing priorities or cost constraints on the business), this can and should be resolved at the earliest opportunity.
In particular, the implementation of new service agreements (and/or rectifying any material deficiencies in existing agreements) for key personnel will invariably be a condition of investment by venture capital investors.
As the company grows, it will be essential to keep employment contracts reviewed and updated to reflect such growth and development.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.