HR Issues (Employees, Independent Contractors, Directors)

These FAQs address the “people” topics that should be discussed early on in order to avoid challenging issues down the road, such as ownership and confidentiality of intellectual property, clarification on roles and responsibilities, employment statuses, and the important documentation necessary to ensure everyone is on the same page.

Is a Member of the Board of Directors an Independent Contractor?

A member of the Board of Directors who is not otherwise an employee (such a person generally called an “Independent Director”) is typically considered a consultant for purposes of employment law. However, every director of the company is, for purposes of corporate law, a “fiduciary” of the company. They, thus, have certain obligations to the company, notably loyalty and a duty not to engage in self-interested transactions with the company, imposed by corporate law. This is true whether or not those duties are included in any consulting or other agreement between the director and the company.

What is “At-Will” Employment?

In most businesses, including start-ups, most employees are employed “At-Will.” This means that, as a general matter, both the business and the employee can terminate the employment relationship at any time, for any reason or no reason.

It is not quite that simple. “Any reason” cannot, for example, be because the employee is a minority. “Any reason” cannot be a whole host of similar things that most readers probably can mostly figure out. And even beyond that, a termination in “bad faith” might not be kosher in some circumstances (e.g. you terminate an employee because her son beat your son’s soccer team – though you might get away with that). Still, at-will employment gives the employer maximum flexibility to adjust the workforce to the business’ needs, and is de rigueur for most employees in most start-ups.

What is an “Employment Letter?”

To make sure that an employee knows that their employment is at-will, the employer should call that out in a written document to the employee, sometimes called an Employment Letter. The Employment Letter often describes the basics of the employment relationship (duties, pay, benefits, etc.), all in the context that just as the employer retains the right to terminate the relationship at-will, the other aspects of employment can also be adjusted at the employer’s discretion. The Employment Letter also usually calls out requirements that the employee conform to company policies including any employee handbook and execute such other agreements as may be appropriate (see “Tell me about Internal Confidentiality Agreements,” “Tell me about Non-Compete Agreements,, and “Tell me about Assignment of Invention Agreements” in the FAQS related to Intellectual Property). 

Tell me about Employment Contracts

Some employees are so important to a business that they are able to negotiate terms of employment specific to their employment, often the most significant of which are severance terms. These are provisions that require the business to provide certain compensation, usually salary/benefits for some period of time after separation, and accelerated vesting of any or all otherwise unvested incentive shares if the employee is terminated “without cause.” Most VCs are very reluctant to provide employment contracts and, in fact, these contracts are far more common at larger, more-established companies than start-ups and, to a lesser extent, more mature emerging companies well past the start-up stage. The specifics of severance packages are often difficult to negotiate, particularly as to what constitutes “for cause” termination, which is the typical way an employer can avoid paying severance benefits, and what constitutes “constructive termination,” which is when a demotion or changing of an employee’s duties constitutes, at the employee’s discretion, a termination of employment.

If there is a take home message on employment contracts for start-up entrepreneurs, it is this: do not enter into them lightly because sophisticated investors including VCs will in most cases be very skeptical of them. Our experience includes deals that have cratered because an investor balked when a founder insisted on an employment agreement with a severance package.

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