Having taken care of employment contracts in 3 different startups, I've a couple of tips to share with startup founders.
Note: I'm not an employment lawyer, so please consult an expert.
What is a contract?
As soon as someone has accepted a job offer from you, a contract exists between the two parties. The terms and conditions of employment can be agreed in more detail at a later stage in a more detailed document which I will refer to as "written employment terms". (Others might refer to this as a "service agreement" or an "employment contract").
1/ When making a job offer, do so in writing
I prefer to make the offer verbally at first to guage the reaction of the candidate. If they hesitate you've then got a chance to adapt you offer. It allows the candidate to ask questions and so they can arrive at a decision quickly. It's also more personal and shows you care.
I'd then follow up in writing to avoid any confusion at a later date.
In a written offer, be sure to include;
- Job title
- Reporting to
- Gross salary
- Probation period
- Notice period (during and after probation)
- Days holiday per year
- Any benefits
Do say that the offer is "subject to satisafctory references and background checks" (important because it gives you a get out if you uncover something problematic).
On stock options, it depends on the company and what has been agreed with the board as to whether or not you can commit to these in the written offer. It may be that board's approval is required. If you are able to mention stock options, mention the actual number of options and how this presently translates to a percentage of the fully diluted stock and the vesting period. The number is important and is what you are committing to. Percentages are more easily open to misinterpretation.
2/ Make sure every employee has written employment terms
This is rule number one. There are lots of different reasons why, here's a few...
First up, it's the law. In addition...
- Intellectual property needs to be assigned to the company. In a startup this is crucial. You're nothing without your IP and if a rogue employee can claim they own the product because you didn't assign the rights in the written terms, you've only yourself to blame
- Where people work after leaving you (yes, some do leave unfortunately) can be important. You might want to have some restrictions. These are increasingly difficult to enforce but important to put in.
- If you raise another funding round, your investors will want to see a data room as part of the due diligience. They will expect to see all your employees with written terms (for the two reasons above) and if you don't want to derail the investment process, get your house in order from day one
3/ You don't need to provide written employment terms prior to the start date (but it's a good idea to do so)
By law you need to provide the written employment terms no later than 2 months of the start date.
However, I've found that candadates will feel unsure about resigning from their current role to join you unless they've seen and agreed to the detailed terms.
4/ Keep your written terms locked away
Written employment terms contain personal data. Data protection legislation means that you are allowed to store personal data but you are required to keep the data secure.
"Keep employment records secure. Keep paper records under lock and key and use password protection for computerised ones. Make sure that only staff with proper authorisation and the necessary training have access to employment records." - from the Quick Guide to the Employment Practices Code by the Information Commissioner's Office
5/ Do not includes sales commissions, put these in a schedule
Sales commission structures will change from time to time. I've not seen a company yet where they don't. If you put them in the employment terms they will be contractualy binding and therefore difficult to change without consent from the sales person.
Better is to set out a schedule to the written terms which states clearly that the commission scheme details are indicative and are subject to chance without notice at any time.
6/ Do not include stock options in the employment terms
These should be referenced in an Option Granting Agreement.
For more details on stock options, see my post; UK Employee Stock Option Plans - The Basics
7/ Create a body of policies and procedures that are separate from the written employment terms.
In the UK, a company has a certain degree of freedom to determine policies and procedures that are relevant for their organisation.
There are certain obligations forseen by law that must be adhered to and then some companies choose to offer a more favourable set of policies above and beyond what is required by law.
My point is that if you put the policies into the written employment terms, they are more difficult to change at a later date. Keeping them separate, perhaps in an Employee Handbook, is the more practical solution.
In terms of what policies to cover, I've found the following to be a good set to get started with;
Important on specific topics: Recruitment, Health and Safety
Practical day to day policies on behaviour: Disciplinary Procedure, Email and Internet Use, Social Media, Expenses, Alcohol and drugs,
Ethical: Anti harrassment, Business ethics / anti-bribery, Equality and diversity
Procedural: Sickness absence, Holiday requests, Probationary period,
Family related; Maternity Leave, Paternity Leave, Parental Leave, Adoption Leave, Homeworking, Flexible Working
You can get an HR practioner to draft these quickly for you and you can then edit them to suit your organisation. Once done, they're a very useful set of tools as you grow and scale the business.