Co-Founder Insists On Employment Contract

July 31, 2012 7:15 AM

There are three of us who are starting a business next year and one of my future co-founders is insisting that everyone signs an employment contract stipulating that we stay at the company for at least three years. Contract violations haven't been discussed yet - the contract hasn't been written yet - but a hefty fine is likely. Is this type of contract common between co-founders? What other risks should I be aware of before/if signing this?

Also, I've already signed a nonsense NDA that prevents me from discussing "the details communicated during the meeting at [DATE]" where details = the most generic business talk imaginable. This contract business just adds to the bizarro pseudo legal games, distrust and weirdness that I'm experiencing.

posted by anonymous to law & government (24 answers total)

Bail. The guy doesn't trust his partners. Run.

Contracts like you are talking about are designed to protect outside investors not the insiders. Same thing with the NDA. I'd run.
posted by JPD at 7:17 AM on July 31, 2012 [12 favorites]

What are your lawyers advising?
posted by futureisunwritten at 7:18 AM on July 31, 2012 [6 favorites]

Lawyer up. It's a good idea to have a contract between founders, but a really bad idea to have a contract that one non-lawyer wrote up and foisted on other non-lawyers, where nobody really has any idea what kinds of things you're trying to accomplish, or whether the proposed contract actually accomplishes them.

IANYL, TINLA.
posted by spacewrench at 7:18 AM on July 31, 2012 [4 favorites]

Run. Starting a business should be about trust and goodwill and setting realistic limits, and the contract should concentrate on what happens when something goes wrong. This guy already reeks of paranoia, security and unrealistic expectations.
posted by cogat at 7:20 AM on July 31, 2012 [4 favorites]

"Sure I trust you, just cut the cards." First, what does the third partner think about this? If both of you are on the same page, maybe it is time to have a talk with the budding legal beagle. Add in the NDA and it sounds like you are not starting a company as a founding partner, but you are, rather, the first employee. I would get a lawyer.
posted by JohnnyGunn at 7:23 AM on July 31, 2012 [1 favorite]

The NDA doesn't frighten me as much as the employment contract. Are you looking to be an employee (not an owner), or is this more of a partnership agreement?

If partnership - run. If you have any portion of your assets tied up in this, then forcing you to be locked in for 3 years... that's a bit frightening. Suppose this business is going downhill after 12 months, you see no positive future however the two other partners think things are about to turn around. Instead of being able to exit the company (and hopefully get at least part of your initial investment back), you are forced to watch the thing circle the drain for 2 more years - and watch your money evaporate as well.

If employee - I would lawyer up. Under no circumstances would I sign a document forcing me to remain with the company for any period of time - maybe, MAYBE I would sign a non-compete clause... even then, a lawyer would be necessary to ensure that you are protected there.
posted by PGWG at 7:28 AM on July 31, 2012

Do not start a business with fear, distrust and self-imposed bizarro legal issues.
posted by Brian Puccio at 7:33 AM on July 31, 2012 [2 favorites]

There is something seriously weird going on behind the scenes with this dude. Run, before you find out what it is.
posted by aramaic at 7:42 AM on July 31, 2012 [2 favorites]

If he's not planning on suing you at some point if something goes wrong, then it's all bluster and he's an idiot for worrying about all of that. If he is planning on suing you if something goes wrong, then it's a terrible idea for you to get into a business partnership with him because it will cost you a lot of time and money to defend yourself in a lawsuit even if you've done nothing wrong. Overall I would say this is a big red flag that this guy is not going to be a good business partner.
posted by burnmp3s at 7:44 AM on July 31, 2012 [2 favorites]

I wouldn't do it. My last startup, I finally had to leave in the third year to get a money job because we hadn't been paid in a year and a half. You have a right to earn a living, and if this business doesn't work out you need to be free to find income.
posted by L'Estrange Fruit at 7:45 AM on July 31, 2012 [3 favorites]

This stinks of someone who has a vague idea of how to start a business and has a really strange idea of how to make this all work in his head.

Hire a lawyer, don't sign in to anything for 3 years, NDA's are standard.
posted by iamabot at 7:46 AM on July 31, 2012 [2 favorites]

Let me guess, you're the partner with the technical skills, and he's the one with the "idea" or the "industry contacts" or the "sales experience"?

If the only penalty is loss of equity – that is, you can only retain your stock in the company if you stay for the three years – then this is not unheard-of, and in fact some kind of vesting schedule is a very good idea so that you don't end up with absent partners who can't legally be diluted.

But that's normally a matter for a partnership agreement, not an employment contract. I'd be very suspicious of a partner who demanded a long-term contract, or even an at-will contract with an overly-broad non-competition clause.

Note that by planning to make money together you have probably already created a general partnership, and have to come to some mutually acceptable agreement to continue the business. Talk to a lawyer!
posted by nicwolff at 7:47 AM on July 31, 2012 [12 favorites]

Also, I've already signed a nonsense NDA that prevents me from discussing "the details communicated during the meeting at [DATE]" where details = the most generic business talk imaginable. This contract business just adds to the bizarro pseudo legal games, distrust and weirdness that I'm experiencing.

You need to abandon any ventures with this wannabe lawyer.

You should retain your own attorney and work with him or her to carefully document the earlier, independent origins of any ideas that were discussed in part at that meeting that you may use in a business later on.

Your attorney can also help you communicate clearly to this person that you have agreed to exactly nothing as far as future work together and that this person is in no way authorized to act on your behalf - especially important if they are the "promoter" type that others have speculated about above.

Suffice it to say that this person sounds unstable and likely to be litigious and you really don't need this person coming along 2 years from now with a bullshit suit trying to take 50% of your next business.
posted by Inspector.Gadget at 7:58 AM on July 31, 2012 [1 favorite]

I would reiterate what others have said.

If (and only if) you know this guy well; if he has been a friend of yours or business associate for years; if before this has seemed like a reasonable guy all around, then maybe, you can open a dialogue with him.

What are his concerns? Which person is he worried about shirking out of the company before three years are up? Is HIS excitement not there? Why doesn't everyone just have a vesting schedule? Why is there an NDA for discussing basic business concerns (not details about the product)? Maybe he is paranoid for a reason, but as others have said, this does not sound like healthy way to start a company.
posted by Phredward at 8:03 AM on July 31, 2012

Equity vesting is 100% common and you really shouldn't start a business without it. You don't want inactive partners (for whatever reason) to be getting compensated the same for your hard work. For new employees particularly, there's often a cliff at one year and then quarterly vesting after that. Between founders, a cliff is more rare.

I don't think this necessary means the guy is crazy. It's understandable to be thinking about the future of the business and what would happen if someone left. His response is uneducated (there are other more sensible ways to deal with this very real issue) but I don't think it necessarily means he's a bad partner. There's lots of bad advice on the internet about how to start companies and what to worry about and how to alleviate it and he may well just be super misinformed about how much you need an NDA or whatever.

That said, you have to judge on your own whether there's a pattern of behavior here that seems like a broader issue. You absolutely have to trust this guy and should be thinking of contracts as a way of making concrete your mutual understandings about the path of the business and all your relationships. They conversation shouldn't start with a contract, it should end with a contract that you've all talked through and agreed on.
posted by heresiarch at 8:16 AM on July 31, 2012 [3 favorites]

It's not outrageous to have a cofounder agreement, nor to be employees. It is both sensible for all of you to have an agreement in place and can make you more attractive to outside investment. For example - what happens if one of you wants to leave and potentially take the IP with you?

But - the devil is in the detail. The contract should be written by a neutral lawyer with risks explained to each of you. Not by one guy, and not by a non-lawyer.

Ultimately you need to get independent legal advice, have an input into the agreement, understand it, and have a long hard chat with your other cofounders about their expectations, fears, plans etc.

Your cofounder sounds a bit like they see themselves as the lead cofounder but they may equally just feel they are being prudent. Certainly it seems like you've got off to a bad start and at a minimum you need to think about whether the dynamic between you all is sufficiently right that you want to spend 3+ years of your life with these guys as your work spouses.
posted by MuffinMan at 8:26 AM on July 31, 2012 [1 favorite]

This is likely actually good for you.

Equity vesting over time is HUGELY important for founders. Can't stress that enough. As someone said above, this is so that people don't dump out at 6 months with 30% of the company forever. This should be in your LLC docs though, which should be prepared by a lawyer for the COMPANY, not for individuals in the company. Any other kind of "fines" though (???) is straight-up dumb. (Unless it's maybe repayment of financial investment, etc.)

Like everyone here says, yeah: the lawyer needs to be yours as well, or you need your own.
posted by RJ Reynolds at 8:42 AM on July 31, 2012

I don't agree with the "don't do business with this guy" sentiment.

You're in a negotiation right now, you just don't know it. So your step is to get a lawyer to represent you. Right now, you're missing some important information, like, "How likely is an agreement of this type to be enforceable, anyway?" This will be a highly state-dependent question.

It may be that after, with your lawyer's help, you push back on this guy, you can reach an arrangment that is mutually agreeable. Or maybe you can't. But it's too early to determine this is anything other than a guy who thinks he has a great idea and plan and who wants to adequately protect himself.
posted by MoonOrb at 8:50 AM on July 31, 2012

There's a lot of details missing from your question but my read is that this guy doesn't really know how to do what you are doing (no shame there) and is a bit nervous (totally fine) and is overreaching to try to establish real, serious groundwork. He may have someone on his side who is advising him in a way that is not productive for the three of you.

All three of you need to back waaaaaay up and start at the beginning again. Business partnerships are fraught from the get-go. But the good that can come of it can outweigh the bad. Think of it like a marriage. You need trust, communication and love to make it work. There will be times that the business looks pretty darn ugly in the morning before its brushed its teeth and you need to love it anyway. *ahem* If you can't agree on the foundation of the business, it's not a good idea to go there. If every twist and turn of the business is made with 1 guy saying, "Let's contract the shit out of this!" and two other guys going, "shake hands and make it work," then you're going to be really frustrated. There needs to be a little bit of both going on and y'all need to figure out how to get on the same page about 1) what the framework needs to look like and 2) how to successfully communicate so you can answer #1.

And, no. Just like I wouldn't sign a contract to stay married for an explicit 3 years, I wouldn't sign this contract either.
posted by amanda at 9:02 AM on July 31, 2012 [1 favorite]

meh ... actually pretty common for a startup company to require that founders stay for a period of time, with a penalty if they leave early ... although generally the penalty is a reduction in equity. A monetary "fine" would be unenforceable as a restraint on trade.
posted by jannw at 9:35 AM on July 31, 2012

I've already signed a nonsense NDA that prevents me from discussing "the details communicated during the meeting at [DATE]" where details = the most generic business talk imaginable. This contract business just adds to the bizarro pseudo legal games, distrust and weirdness that I'm experiencing.

I get two things from these sentences—apart from the glaringly obvious red flag that you just used the word "distrust" to describe your own experience starting a company with a partner. First, it doesn't sound like you have much respect for your cofounder. And second, you don't sound like an assertive or independent person. (You signed your name to a document you believed was "nonsense.")

I'm an attorney with some experience with start-ups. I'll be honest, I clicked open this thread expecting to roll my eyes at a few dead-wrong legal "answers." But most people are ignoring the legal-speak and I totally understand why. It isn't necessary to go there.

To be fair, your actual questions are answerable, and telling you not to continue with this business venture doesn't really answer them. That isn't really in the spirit of AskMe. For my part, I'll tell you that I won't try to answer your questions because your second one ("What other risks should I be aware of before/if signing this?") is unambiguously asking for legal advice, and no matter how many times I type "IANYL" there's no avoiding that if I attempt to answer that for you, then I would be giving you legal advice. I can't do that. So it's safer to just decline to answer altogether. Sorry. I'm not your lawyer.

But I can give you general human advice, which is that if you ask people with experience in this area (business owners, investors, attorneys) they will always give you the exact same analogy—so it's no coincidence that this is the exact same analogy that Amanda just gave you—which is that starting a business together is like entering a marriage. You need to prepare for death, disability, divorce, or dissolution. Trust and mutual respect are key. You don't necessarily need equality, so it's not a dealbreaker to not be assertive or independent...but you are describing a situation where you are being pushed around by someone you neither respect nor trust.
posted by cribcage at 9:35 AM on July 31, 2012

Noooooooo.

Cannot imagine any reason you would do this.

Equity vesting, as discussed above, is NOT the same as an employment agreement.

Don't sign stuff that you don't understand or see the purpose of.

(I am a startup lawyer, TINLA except maybe the last sentence.)
posted by chickenmagazine at 10:01 AM on July 31, 2012

This contract business just adds to the bizarro pseudo legal games, distrust and weirdness that I'm experiencing.

Being business partners with someone is HARD WORK, even if you have a great relationship with them and a successful business. If you haven't really even started working together and you already feel distrustful and weird? That's not a good sign for your future happiness wrt this project.
posted by Countess Sandwich at 11:52 AM on July 31, 2012

A common and acceptable thing for new partners to do (however the business is structured) is to enter into a buy-sell agreement and a non-compete agreement. A contract for services is very common for certain key employees, but not for the co-owners.

This is what your lawyer will tell you when you ask him.
posted by yclipse at 11:52 AM on July 31, 2012