Executives are looking for new opportunities and finding them. While some companies are not willing to give executives the full protection of an employment agreement and only provide a vague offer letter, there should always be a negotiation over the essential terms of any new opportunity, including the description of the position and reporting line, the compensation and equity offered and clear definitions around termination and dispute resolution. While a full employment agreement should be evaluated by an attorney to ensure proper and protective definitions of the employment relationship and the terms of any termination, an offer letter should also be reviewed by counsel before agreeing to its terms–even if it is only a page or two.
In offer letters and employment agreements, there are often important protections missing. Ultimately, the memorialization of the offer of employment should reflect the understanding of both parties – not only the employer. For example, a full description of the role, details of the compensation arrangements, definitions around “Cause” and termination provisions can always be added to any offer letter to make it more protective of the executive and to provide clarity to both parties.
In addition, there are generally ancillary agreements that accompany even the shortest offer letter, and those agreements usually disadvantage the executive in the form of restrictions on future employment and the forfeiture of equity. There are some serious legal consequences to breaching these restrictions and, again, legal help is required before signing.
For example, each state has different laws with respect to the enforceability of non-compete clauses, and some have statutes making most non-competes unenforceable but many – even California – which has an almost-total ban on non-competes – make exceptions for senior executives and partners in certain circumstances. Other states have statutory rules regarding the length of the non-compete period and the required consideration for such restraint. Non-solicitation provisions may result in making an executive less valuable if he or she is restrained from hiring the team they left behind. Again, each state has its own laws on solicitation of employees, clients, investors, and even vendors and these restrictions must be reviewed before an executive signs these agreements. Finally, making sure the contacts an executive has built up over the years are not at risk of being gifted to the company upon departure is important – and easily missed when someone signs an agreement without counsel.
It’s expensive to hire an excellent employment lawyer but not doing so is often more expensive. First, failing to negotiate protections around termination can result in the loss of any wealth accumulation the executive has built over the years of employment – many of these agreements include automatic forfeiture and repurchase clauses on unfavorable terms. Second, being in the wrong forum or having an unfavorable legal fees clause if and when there is a dispute is another trap for the unwary.
Even if the Company is loathe to make changes, it is better to go into a new employment relationship with full knowledge of the risks and what protections one has.
Hopefully, after a review and negotiation of an offer or employment agreement, the executive can put it in a drawer and never take it out again until they retire unless, of course, the next great offer comes their way sooner.