Finding great talent for a startup company can be intense and competitive, and often the last thing on a founder’s mind is the best way to formalize the new employee relationship. On one hand, spelling out the terms of employment seems simple enough, but on the other, a company does not want to create a contractual relationship where one need not exist. Most employees are hired “at-will”, meaning either party can terminate the employment relationship at any time, with or without notice, for any reason, as long as not discriminatory in intent. So what are employment agreements – and do you need one?
Although not required by federal law or many state laws, a formal, written offer of employment to prospective employees is a best practice for most new hires. The offer letter is not a legal contract, nor does it create binding employment. Often, the offer letter memorializes the following key terms of employment, and is signed by the employee:
- Title or position
- Reporting relationship
- Start date/term of employment (if any)
- Rate, frequency and manner of pay
- Full/part time work
- Summary of equity grants
- Eligibility of benefits (details often listed in a separate policy or plan)
- Confirmation of at-will employment
- Conditions of employment, including:
- successful completion of background and reference checks
- confirmation that employment does not violate any non-disclosure agreement or non-competition agreement she has with a previous employer
- Signing of separate confidentiality, protection of proprietary rights and non-compete agreements
Many employers require employees to sign confidentiality and proprietary rights agreements to protect valuable intellectual property assets, including trade secrets, from disclosure. These agreements are often signed at the start of employment.
Most startups stick with offer letters for all their employees. For more senior executives and management personnel, however, a formal employment agreement may be necessary. These lengthier contracts include the above provisions found in an offer letter, in addition to the following:
- Employment for a term of years
- Notice of termination
- Severance benefits if terminated without good cause
- Bonus compensation
- Detailed terms surrounding profit-sharing or equity grants
- Accelerated vesting provisions upon a change of control
These terms are more complex and often create additional legal, tax and compliance issues which should be discussed with an attorney.
In most cases, an offer letter will serve the purpose of hiring an employee at-will without creating further contractual burdens. For more complex situations and senior hires, an employment agreement will be the best option. Please contact us if you have any questions regarding your business or start-up and the legal issues when hiring.
This post is provided for general information purposes and is not legal advice. As always, if you have any questions about this post or how it might impact your business, contact one of our attorneys.