No Mess (Employment Agreements)

I thought it might be useful to start a blog series on stuff that VCs don’t like to see.  I know, some of you are laughing right now thinking “that will be an endless series…..”   I will pick random topics, but if you have any ideas, please let me know.

Today’s “No Mess” topic relates to restrictions on firing people.  Put simply, VCs like to see boards of directors that have maximum flexibility to terminate employees.  This relates to all levels of employees (not just senior execs).  Here are some examples of things that result in unattractive restrictions:

1.   Employment agreements:  if possible, avoid putting the phrase “employment agreements” and word “VCs” in the same sentence unless of course the sentence is “VCs really don’t like employment agreements.”   Employment agreements typically confer a severance payment to the employee (for example 3 months salary), and that means $ out the door (in other words an unattractive restriction).  Employment agreements, if they do exist, should always condition the payment of severance on the receipt of a written release from the employee and ideally an agreement not to compete as well.

2.  Employee handbooks that provide for severance:  I once ran into a situation where a startup company had an employee handbook (not all small startups have those, but this one had about 150 employees) that provided for 2 weeks severance upon termination for all employees.  Yikes.  Again, an unattractive restriction.  I know, I am sounding callous.

The general rule is that employees are “employees at-will”, which means that they can be fired any time (except for reasons related to a protected class like race, religion, sex, national origin, etc.) and can quit at any time as well.  An employment contract alters the “at-will” norm as does a handbook that provides for severance.  Again, it might sound a little callous, but these provisions cause problems often.

As the Godfather might say “Make sure that you can get rid of people without a mess.”

Enjoy the weekend.