Contents
If you’re in the early stages of your business journey, you might agree that startup fail rates can be pretty daunting.
In fact, according to Harvard business professor Noam Wasserman, 65% of high-potential startups fail as a result of conflict amongst co-founders. But don’t be disheartened too easily.
The idea of a new venture is exciting and concepts are flying in left, right and centre. This is why co-founders are an essential part of any enterprise. As long as you choose the right co-founders and have the right agreements in place, your startup will usually start off strong.
So, why is it important for a company to establish a formal legal relationship with its co-founders?
In this article, we’ll look at whether there’s a need for co-founders to sign an Executive Level Employment Agreement, and whether having this official agreement improves the way a business operates. But, first, let’s go through a co-founder’s obligation to a company as an employee.
A Co-Founder’s Duty To The Company
A Shareholders Agreement will govern the relationship between co-founders. It outlines how decisions will be made, the distribution of shares and other matters of their relationship.
However, an Executive Level Employment Agreement is still required, as a co-founder remains an employee of the company. Co-founders are valuable employees within their companies, and this type of agreement formally establishes their role in the business.
What Is An Executive Level Employment Agreement?
An Executive Level Employment Agreement is a legally binding document that outlines the relationship between executive employees.
This can include co-founders and various managerial positions amongst C-level employees. C-level employees are the top executive positions in a company and are some of the most valuable employees to a company.
An Executive Level Employment Agreement protects both your business and the relationship with your executive employees. Let’s go through some common clauses found in these types of agreements.
Restraint Clauses
Restraint clauses set out a specific period of time and/or a geographical location where the executive employee must not engage in certain conduct.
Restraint clauses acknowledge the executive employee is exposed to highly confidential information, and the risk of harm is therefore much higher should the employee leave. This is why restraint clauses are drafted for the executive employee to be bound by them even after employment ends.
Some examples of restraints that may be put on employees are:
- A restraint on dealing with any customers the employee has dealt with within a certain period of time of their employment ending (otherwise known as non solicitation)
- A restraint on working for a competitor within a certain time period after their employment ends, and within a certain area (otherwise known as non competition)
- No derogatory comments: the employee must not badmouth the company after they have left
- No representation: the employee cannot make out that they are still connected or working for the company once they have left
It can be difficult for the court to uphold certain restraints. For example, not allowing a former employee to work for a competitor may be considered to have too significant an impact on a person’s ability to make a living. Regardless, restraint clauses are still a good way for businesses to protect any internal information being used against them.
Avoiding A Conflict Of Interest
Where certain activities could potentially turn into conflicts of interest, it’s ideal that the company is made aware of them. The co-founder should never act against the business’ best interests. If they do, dilemmas are bound to arise. Notice of conflicts can minimise problems before they become too damaging.
A ‘no conflict of interest’ clause might specify, for example, that an employee cannot enter into any contracts, invest, have a financial interest, or work in a paid or unpaid role with another entity that, in the company’s opinion, would pose a conflict of interest.
Media Dealings
Social media is now a common aspect of every employment relationship. In startups particularly, it’s likely that executive employees will need to engage in media dealings in the course of their employment.
As such, you’ll need to cover the basics of media dealings in any Employment Agreement, such as what they can and can’t post on social media. For example, your agreement might prohibit employees from posting anything about work on their personal social media which could reveal confidential information. It is important for a business to establish social media policies from the beginning and protect their brand.
Authority Provisions
Considering the higher stakes at place with co-founders, these provisions will detail the range of authority the co-founder holds, such as what type of contracts an employee can enter into on behalf of the company.
Standard employment agreements will detail the norms of a salary and requirements, however, it is important to make sure co-founders know their boundaries within the business.
The Handover Process If Deciding To Leave
If a decision is made where the co-founder plans on leaving, notice would allow for a smooth transition for the individual who takes over. It will ensure that the new co-founder is up to date and aware of what is expected of them. This also helps the transition amongst other employees, limiting disruption and maintaining productivity rates.
These are common clauses which can be found in normal employment contracts. However, clauses such as authority provisions and the nature of restraints are exclusive to executive employees considering their position and the confidential information which they are exposed to.
What is the difference between an Executive Level Employment Agreement and a Standard Employment Contract
A Standard Employment Contract will usually include the basics, such as:
- An employee’s salary and leave
- Confidentiality
- Termination rights, probation periods and work responsibilities.
However, an executive level employment agreement considers the higher stakes that come with being a co-founder or C-level employee. Executive employers and co-founders are valuable figures within businesses and with this value comes added responsibilities. An employer will include further clauses (such as the ones mentioned above) to protect their business in executive level employment agreements.
How Can An Executive Level Employment Agreement Help My Business?
A co-founder isn’t just another employee. They are individuals who are in possession of more intellectual property than the average employee and their skill set makes them a valuable asset for businesses.
An Executive Level Employment Agreement helps establish this within businesses by breaking down the rights and obligations of the co-founders. Co-founders play a major role in businesses, so it’s important to create a formal agreement which makes them aware of their position, protecting the interests of both the co-founder and the company.
In the workplace, it is important to know the difference between a social and working environment. An Executive Level Employment Agreement helps maintain that workspace and reminds co-founders of their duties and role within the business.
Termination Provisions
There’s a reason why some couples choose not to write a prenup. No one really wants the honeymoon to end. Well, the same thing applies to businesses.
In Executive Level Employment Agreements, termination provisions are just as important as the rights and obligations of a co-founder. Regardless of the manner in which their tenure has ended, a co-founder was entrusted with confidential business information and their role allowed them to have access to various departments of the business.
Even though businesses wouldn’t like to see their employees leave, it does happen. If and when it does, it’s important to protect the business’ interests and to have this in writing.
What Other Agreements Might Co-Founders Need?
Co-founders might require other agreements depending on the nature of their business structure. A partnership business structure will require a Partnership Agreement. This is where the business is not separated from you and your partners, with liability shared amongst the founders.
On the other hand, a company structure will need a Shareholders Agreement or Founders Term Sheet to outline the roles and responsibilities of the co-founders.
What to take away…
Executive Level Employment Agreements protect the business and make sure that co-founders or C-level employees understand their duties. These are positions which come with authority and value, and having a formal relationship will improve how these roles are performed.
The decision to contractualise your relationship with your co-founders through an Executive Level Employment Agreement is not meant to be a stressful one. Don’t hesitate to reach out to our team of lawyers here at Sprintlaw on 1800 730 617 or at team@sprintlaw.com.au for any of your concerns.
Get in touch now!
We'll get back to you within 1 business day.
Top 3 Legal Mistakes
Book in a free consultation with us to discuss your legal needs.