High-growth companies were once early-stage startups that leveraged their human resource. Right decisions made at the right time, in hiring and retention set the organisation up to scale. These would include offer, governance, participation, and protection.
Offer Letter
Employers are under no obligation to send an offer letter to prospective joiners. Yet trimming out this leg of the process is a costly mistake, in our experience.
This document is the first in a paper trail of the employee’s key responsibilities, terms, conditions, expectations and benefits offered, start date, and termination conditions.
The budget saved in not drafting a proper offer letter gets expended by a few more multiples. Employees are seen to claim post-termination benefits and compensation from an offer with loopholes. Bootstrapped startups can consult for a good draft for far less than settlements they end up making with former employees.
We have seen the scenarios wherein the employees have executed the offer letter but have used the same to leverage better offers from other organizations. To avoid such situations, we advise the startups to have some penalty clauses in place in the offer letter itself.
The hiring process in pandemic times has taken a huge toll. Due to work from home culture, the employees do not execute the offer letter which becomes difficult for the employers to enforce their rights under the offer Letter.
We suggest employers execute the employment agreement with the employees on the day of joining the organization.
Compensation
Startups in the early stages lack the consistent cash flow and revenue stream needed to hire and retain quality talent.
Therefore compensation structures need to be charted keeping other incentives, such as equity (ESOPs), in the mix with the salaried portion. These terms should be memorialised in the employment contract.
Offering Equity to Executives
The rights vested in, the movement of, and the value of shares issued to employees are also critical decisions to make.
Can the company repurchase shares from employees, would they be required to forfeit shares when they leave the startup, the valuation of the shares, the restrictions on their transferability and the rights of first refusal, drag-along and more, are things to structure.
We suggest that the ESOP policy for incentivising the employees should contain clear provisions regarding the treatment of options that are not vested and the employees have either resigned for cause or without cause.
Classifying Workers
To manage tax implications on the startup it is important to classify the engagement of various “consultants”, “contractors” and exempt employees and pay attention to how they are compensated.
Hiring before leasing office space makes remote work a necessity. Startups often find themselves with telecommuting employees. This raises the need to track working hours and consequent entitlements and benefits for various classes of employees.
Non-Disclosure Agreements
Employees who will be privy to the trade secrets and intellectual property (IP) of the startup, must sign non-disclosure agreements (NDA).
A well-drafted NDA is clear about the type of protected information and its permitted use. It also describes the mode of maintenance of such information by the employees and the prohibited storage areas.
The NDA restricts employees from taking confidential information outside the office and requires them to return the information when they are terminated from employment.
In order to reduce the paperwork, we suggest our clients incorporate the provisions w.r.t confidentiality and intellectual property in the employment agreement itself.
Non-Compete and Non-Solicit Provisions
The IP of the business need also be protected through provisions restricting employees to start a competing business or soliciting their employees or customers.
A well-drafted, non-compete and non-solicit clause are descriptive yet not so broad as to be unenforceable.
Assignment of Intellectual Property
Startups should invest in documentation to protect the intellectual property designed, devised, developed, perfected or made by its employees. The assignment needs to be done to the organisation and the startup needs to ensure to communicate this effectively in the employee handbook agreement.
Company Policies
An employee handbook is generally not at the top of a startup’s list, particularly with only a lean team. Sexual harassment, discrimination policy and POSH compliance early on is a necessity even in the early stages. It is a way of pre-dispute risk management.
Before hiring any employees, it is also a good idea to have an equal employment opportunity policy. Apart from this, we suggest employers start the induction for the new employees. During the induction, the employers should give the employees a walkthrough of the company policies.
After the induction is completed, the employer should share with the employees their company policies so that they have a record that employees are aware of the company policies. This is required mostly because the employers these days use the virtual portal for all the company policies which the employees do not check and it gets difficult for the employers to enforce their rights.
