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How often does the president hired for a non-tech startup have an employment agreement and what are the terms?

Oliver Bootz's Profile

We are working with a non-tech joint venture/startup in the aviation space and they are in the process of recruiting for a president. One partner has no experience with employment contracts (they are in Asia) and the other is not a fan. We believe the they will be challenged finding a president willing to take the risk if they don't have one. That's why we are going out to the experts to see how often presidents get employment agreements and to find out what's generally in them. Look forward to your input.

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Oliver,

I've got limited experience here, but some. My experience is that so long as the risk profile is similar, there is not much difference from tech.

What I've seen, largely, is a spectrum.
On the Prez side there is:
-risk of taking this job vs another, giving up what they have, etc.
-reputation risk (startups can have bad eggs)
-volatility risk: expect to take a week per $10K of earnings to find a new gig.

The structure tries to offset that risk.
-Early termination clauses, paying the Prez off unless their is cause.
-Payouts for events that are potential, such as acquisition.
-Retention items, such as deferred comp with claw-backs, equity vesting, etc.

Bad mistakes:
-Termination payouts that follow the employment. Eg bankers who get canned by the board after 5 years and get a huge bonus. By that point, they should "own their own employability".
-Options. There is no downside, so you're incentivizing volatility and risk.

At the end of the day, you're asking the pres to risk time (which you can never get back), reputation (hard), and potentially money. The agreement should offset that risk without creating structures that pay for bad behavior or otherwise pay for non-value events.

The "spectrum" that I spoke of is that there *is always* a price. The question is how you pay. Without an employment agreement, maybe you'll need to fork out big cash up front, plus a hefty salary. The employment agreement is designed to reduce that amount that you have to fork up out front, and bring the comp back to a "if this were a stable situation" level. If your people don't want an employment agreement...fine. It just ends up costing more because you are paying for risk as well as the CEO.

Cheers,

Keith

Oliver Bootz
Title: President and Chief Evangelist
Company: Elan Aircraft Seating
LinkedIn Profile
(President and Chief Evangelist, Elan Aircraft Seating) |

Thanks. Very helpful.

Topic Expert
Kent Thomas
Title: Founder
Company: Advanced CFO Solutions
(Founder, Advanced CFO Solutions) |

Keith makes some great and valid points. I would add a few additional:
1. As Keith mentions, most good CEO's will demand an employment agreement in order to protect themselves and they should get severance if they are terminated without cause - work carefully with your attorneys to define "cause".
2. You can protect the investors & founders by making sure that the president's stock options are vested with a one or two year cliff (no vesting until the specified time frame has passed) so that if they don't perform and they are terminated early on, you don't have to deal with vested stock options.
3. You can help protect the president by providing a double trigger change of control accelerated vesting option for her / him. This provision allows a C-level executive who provides great value to the business to receive some or all of the stock options that were granted but are not yet vested if a sale or merger of the company happens earlier than expected and if their employment is affected negatively. The"double" trigger is the key here because if the company is sold but the acquirer wants to keep the team intact, there is no acceleration of vesting.
4. The agreement needs to address the president's incentive compensation plan in objective detail so there is no question about what is available and how it is earned.
5. The agreement should address the president's duties and authority as granted by the board and any restrictions imposed in clear detail.
6. The president's agreement (and those for all other employees of the company) should contain confidentiality, non-disclosure, non-solicitation and inventions assignments provisions to properly protect the company.
7. Non-compete and non-disparagement clauses are also common and you should discuss them with your attorney for enforceability and advisability.

Good Luck!

Oliver Bootz
Title: President and Chief Evangelist
Company: Elan Aircraft Seating
LinkedIn Profile
(President and Chief Evangelist, Elan Aircraft Seating) |

Thanks. Good insights.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

On point 7: absolutely. We can't do that in California (it will taint the contract), but has some enforceablity in other venues, and all the big firms use them. Just check with your local attorney first to get it right!

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