By Joel Nied, Esq.
Let’s say you are the president elect of a hypothetical country and you appoint a guy to be your, for the sake of our example, let’s say your national security advisor. The guy is loyal, has impressive credentials, and is happy to be your attack dog from time to time. He is the greatest appointee ever. But, a few weeks into your hypothetical presidency, you find out your appointee has a skeleton or two in the closet. Some really big, ugly skeletons. Maybe more than two.
So, you hem and haw, and probably procrastinate a week or two, longer than you should. Soon enough, however, you fire him. Done. And now that the mess that guy caused you is over and you can get on with the most spectacular presidency ever.
Now let’s set up a slightly different hypothetical. You start a company. One of the guys who helped get things off the ground comes on board as the Chief Marketing Officer. You give him some founder’s shares and you are off and running. He has a great track record, helps you pitch to potential clients and investors, and is overall a solid asset.
But, a few months later, you find out your employee has a skeleton or two in the closet. Some really big, ugly skeletons. Maybe more than two. So, you hem and haw, and probably procrastinate a week, or two, longer than you should. Soon enough, however, you fire him. Done. And now that the mess that guy caused you is over and you can get on building the most spectacular company ever. Right? Wrong.
Why? Because it turns out the guy had an employment agreement and owns stock in the company. So, after you fire him, he demands that you pay him six months’ salary. And then he shows up at shareholders’ meetings, and even worse demands information from time to time from the company.
And, even worse than that, this scandal-ridden guy continues to tell everyone at every cocktail party and happy hour that he is a shareholder of your company. At that point, you are probably wishing you had appointed Michael Flynn as the National Security Advisor instead of the disgraced CMO who you just can’t shake.
There are ways, however, to get rid of that embarrassing employee as easily as Trump eventually ditched Michael Flynn (and without the lingering fear of Senate subpoenas and calls from Robert Mueller).
The first is to always have any stock grant subject to vesting schedule and a repurchase option. Both accomplish the same objective: they give the company the right to repurchase stock from a terminated employee. The mechanisms are different and the price you pay to repurchase them may vary, but they accomplish the same goal of making that former employee a former stockholder.
Those repurchase options should extend to founders if your company works in a regulated industry. For example, if your company does business with the government, a debarred (prohibited from doing business with the government) shareholder can block the entire company from doing business with the government.
The second way is to not include a severance provision in your employment agreements. If you must include a severance provision, make sure to have a clause that allows you to deny severance under certain circumstances. Often called “termination for cause” provisions, the language allows an employer to terminate an employee without advance notice if the employee does a range of misdeeds, from making the company look bad to being arrested for a “crime of moral turpitude.” The language of the “termination for cause” provision often varies widely, but the goal is the same: releasing the employer from having to pay a misbehaving employee after he or she has been fired.
It is unclear whether presidents of the United States regret hiring or appointing people to their staff. It is clear, however, that presidents of companies often do have regrets over hiring decisions. With a few thoughtful steps in advance, you can ensure that your regrets will not linger any longer than necessary.
*photo courtesy of Gage Skidmore