Hiring and Firing: Avoiding the Grey Areas
Firing (or being fired) leads to litigation most often because of lax hiring practices. Founders, investors, early hires - all of you tend to take an almost abstract approach to the agreements you sign. This needs to stop.
An employment agreement needs to function as a roadmap. If there are grey areas, someone will take a wrong turn and litigation will ensue.
How to avoid this? You should not make or accept any employment offer that does not contain terms that allow you to calculate precisely what an employee is to be paid when he or she leaves the business. This means, at a minimum, the offer needs to specify: (a) how vacation accrues (monthly or otherwise), (b) whether unused vacation carries over from year to year, (c) whether bonuses and other incentive-based compensation will be paid out on departure, and (d) what will happen to options or shares held by the employee after he/she leaves.
Without this kind of clarity (and even in spite of it), parties on both side of the table are incented to exploit the grey areas for their own benefit. This may be less of a risk in jurisdictions where employment-at-will is a concept, but here in Canada our laws are pro-employee, to the point where employees are always incented to ask for more unless an agreement comprehensively disposes of all matters.
On the other side of the table, investors and employers often will take a limited view of what their obligations are to a founder/employee who is leaving the business, especially when it comes to stock. Take our friends at RIM, for example.
In 2004, Bryan Taylor, a VP of Engineering at RIM, was terminated without cause a few months before some 40,000 stock options granted to him were scheduled to vest. The options, with a strike price set at 1999 levels, would have netted Taylor $4.4 million if exercised and sold right away. While RIM apparently agreed to pay Taylor several months of severance, it refused to allow him to exercise the options, which vested during the severance period. You can read more about the matter here.
Taylor sued and the matter made its way through the Ontario courts until it was finally dealt with in April 2010. By that time, RIM had conceded that, in fact, Taylor was entitled to the options, but disagreed as to how much cash they should have to compensate him. Taylor argued that he was now entitled to more than the $4.4 million in question, since he would have held onto the shares which would now be worth approximately $12 million. The Ontario Superior Court partly agreed, holding that Taylor likely would have held onto 75% of the options in question.
Next time you sign an employment agreement (as either employer or employee) ask yourself whether the agreement is clear, or whether it’s possible this kind of problem could arise. Then smack yourself on the head and revise.