One of my partners, Jonathan Keselenko, who practices in the Employment area, developed a nice simple termination checklist that I have found useful.  One thing about this list is that it applies to situations where the employee is an “employee at will.” If there is an employment contract, you will also need to review the contract to make sure you meet its requirements as well.  Here is the list, with some additions from me:

EMPLOYMENT TERMINATION CHECKLIST

• Have a good reason for the termination, and make sure that the reason is consistent with the documentation.
• Provide the employee with a truthful explanation for the decision.  For example, if the employee is being terminated for poor performance, do not characterize the termination as a layoff.
• Don’t be gratuitously cruel.  You should inform the employee of the reason for the termination, but you do not need to convince him that you are right or win a debate.
• Conduct the termination in a private and respectful way.
• If you any concerns about litigation, two people from the company should be present at the termination meeting, and both should take detailed notes.
• Pay: be prepared to pay all compensation due, including unused but accrued vacation pay.
• Explain that the employee will receive notice about continuing group health coverage under the Comprehensive Omnibus Budget Reconciliation Act of 1985 (“COBRA”).  Explain that all other benefits will cease as of the termination date.
• Provide state-issued information about filing for unemployment, even if you think the employee is not eligible.
• Collect all company property from the employee.  Consider having the employee sign an acknowledgement form that he has returned everything.
• Allow the employee to collect any personal belongings before leaving the work premises.
• Block the employee’s access to the Company’s premises and electronic access to the Company’s computer systems and email.
• If the employee is listed on your company website, remove him from the site.
• Remind the employee of any restrictive covenants (by this I mean noncompetes, nonsolicits, confidentiality and inventions agreements) and provide an additional copy.
• Think about how you intend to communicate the employee’s departure to customers and other employees, if at all.  Who needs to know and why?  Make sure you have a legitimate business reason for the communication.
• Think about whether you are willing to give the employee a reference. 
• Inform the employee about options that may be exercised (or restricted stock that may be repurchased by the Company).  Be prepared to repurchase restricted stock (if you intend to).  The repurchase agreement may not be “self-executing” with the result that you may have a time frame for acting.

Having now answered (to the extent I am comfortable doing so in the absence of any specific knowledge or facts of any particular case) the only question any client ever asks about advisory boards, I hasten to note that there are a lot of other – far far better – questions that could be asked about advisory boards.  Here are a couple:  What value can I reasonably expect from a member of my advisory board?  How do I get that value?  Why do I need an advisory board at all?  How do I find good advisors?

I don’t have any objective or quantifiable information around whether and how much value start-ups derive from their advisory boards.  My gut sense, based only on my law practice, is not much.  Mostly, what start-ups get is the opportunity to name a few luminaries on a slide towards the back of their deck.  The second thing they probably get is some introductions, probably to investors. 

I am sure there are some companies and entrepreneurs that have benefited greatly from advisory boards, but I have to believe this is a small number.  Below are a couple of links to blog posts on the subject of advisory boards.  The one from venture hacks seems to me to be particularly good in that it covers a lot more than just compensation, although it also covers comp.

Venture Hacks “Everything you ever wanted to know about advisors”

Ask the VC “Are Advisory Boards Helpful?”

Ask the VC “Advisory Board Compensation”

Mike is right when he says that faced with “limited personnel and monetary resources… many emerging companies employ a band-aid approach to HR-related issues”.  With that in mind, he sets out the areas where employment related disputes for venture-backed start-ups most consistently arise. Keep reading for a synopsis of the 5 major areas where venture-backed start-ups stumble and expose themselves to disputes as they relate to employment law...

2)Liability due to the hiring arrangement - So you have found some individuals you want to bring on.  Have you clearly documented the understanding between the start-up and the new hires as to their responsibilities, their compensation, and the contingencies that would make the relationship void?  Are the compensation arrangements clearly documented?  If compensation is in the form of equity, is there a vesting period?  Does such an agreement clearly claim that it is the only and final agreement between the parties and overrules any coffee shop “conversations” you might have had the potential hire where you promised to give them 50% of the company?

3) Liabilities due to misclassification of your hire: - The hire can be either an employee or an independent contractor.  Having the person qualify as an independent contractor means you can avoid the federal and state laws governing an employment relationship.  However, a problem arises when a company misclassifies a hire as an independent contractor or takes steps that would destroy that classification and switch it to an employee – employer relationships in the eyes of a judge.  It can be expensive and time consuming to misstep on this classification and have an independent contractor later claim to be an employee and demand all the protections and benefits afforded to an employee under state and federal laws.  It might in some cases be more worthwhile to set up your hires as employees rather than expose your venture-backed start-up to such a large risk.

4) Liability due to noncompliance with wage laws: - As a venture-backed start-up with limited resources you might want to defer payments to your employees temporarily for a greater reward further down the line.  The problem is you might as a company run into formidable, state, and federal sanctions for taking such a course of action.  In some states directors and officers of the company might be held personally liable for what could be considered withholding wages.

5) Liability due to Inadequate Protection of your I.P. – The use of standardized offer letters, NDAs, non-competes might be efficient but opens the door to IP squabbles and even worse, IP loss.  Give special thought to agreements and try to tailor them based on the potential hire’s skill set and deliverables, and be sure to understand and implement a process that manages your I.P risk when bringing on new hires.

Long story short, this stuff is complicated.  I’m a lawyer and I work with start ups day in and day out, but I’ll still talk to an expert to get a full and complete understanding of the risks in a particular legal area.  More importantly, it’s more than just knowing the law, it’s the application of the law to the unique circumstances that impact your business and venture.  You want to be able to take well reasoned risks on these issues and knowing what you are gambling with and the potential downsides are essential for growing your venture–backed start-up successfully.

I have often heard senior advisors refer to the decision to raise venture funding as going down a path  where the final destination invariably means losing control of your company. Determining if you want to walk down this path is a question often not given enough serious thought by founders.  Think of it as an identity crisis of sorts - one way to determine if the founders are ready to take the VC route is for them to ask themselves: Am I ready to make distinction between myself and the start-up? If the answer is "NO - there is no distinction", then the path from start- up through venture funding to hopefully an exit will be at best more painful and angst ridden than normal and at worse will be a disaster of sorts. 

However, if you think of your company as its own entity (albeit one where you have significant input and credit for it's existence) then it helps to think of going down the venture capital route as sending your kid off to college. He/she is going to grow up to be their own person and though you will always have some influence in their lives, increasingly your sphere of influence will diminish and be replaced by that of their peers, partners, teachers etc..

Letting go also helps entrepreneurs do what they do best -find new problems to solve and start new companies!

Copyright: Micahel Valdez, iStock Photo

- Posted using BlogPress from my IPad. 

Percentages are fixed, however #'s are always changing.  When a founder is promising a consultant, advisor, team member, investor (or whomever) a percentage of the company he/she is no doubt promising them a percent of the company at that point in time (so if there are 1,000 outstanding and issued shares, 20% would be 200 shares).  However, the pie is always growing so that 1,000 shares today might be a 1,000,000 shares in the future and that 20% is all of a sudden 200,000 shares. 

Now you're probably wondering, PT are you seriously saying that someone could have a credible argument that the 20% of 1,000 shares could be extrapolated to mean 20% of 1,000,000 shares?!! Get real.

I'm not saying it does, but depending on the facts and the circumstances, someone could very possibly make an argument that it might. Also, if it does or does not is besides the point.  Take this in the perspective of an exit or a large round of VC financing.  You really want this joker showing up a week before you close the deal with a document or a written agreement stating that you promised him/her X% of your company?  Granted, it might not be a very credible argument, but it's going to take either time or money (or most likely a lot of both) to make this go away and even worse it will create doubt in the mind of the investor/buyer, at the very worst could crater the deal.

Promising someone X% of your company? Don't do it - you'll sleep easier and so will your lawyer.

 In other words....how not to give away too much of your company to slackers and flakers who don't deserve it.

Every aspiring start-up founder and founding team should give this a quick read.   Click here for the full post.

How much equity a company should grant depends on several factors, some of which include: what the particular advisor brings to the table in terms of contacts and experience; the level and volume of advice that they are going to be dispensing to the board of directors and the officers of the company; how long they will be actively involved with the company and ; whether the advice that they are providing is something that is conceptually important in the long run or is more relevant to a certain phase of the company. Generally speaking, a company should add somebody to their board of advisors only when the person will have a long-term relationship with the company and when their advice and contacts will actually help the company move from one stage to the next.

Most advisors do not work for equity, rather, they do it because they are drawn either to one or more likely a mix of the following: the problem that the company is addressing, the founders, or the technology the company is producing. At the same time granting them equity is a nice gesture on the part of the founder to show them that they are part of the company. Granting advisors equity also allows founders to draw-up non-disclosures, confidentiality, and other ancillary documents for advisors to execute to formalize the relationship between them and the company. In the terms of ranges, take everything I say with a grain (or pound!) of salt. We’ve seen ranges anywhere from 0.25% of the outstanding equity to 0.5% and sometimes even 1% or higher in exceptional circumstances.

One thing to note about the board of advisors is that unlike the board of directors, the advisors are not really bound to the company by fiduciary duties. These duties include the duty of care, the duty of loyalty, the duty of confidentiality, the duty of disclosure and other duties that are inherent in a director’s role and bind them in their day-to-day activities. To counter this deficiency, any advisor you bring on into a formal advisory role with the company should execute, at the very least, a confidentiality and non-disclosure agreement. In some cases I have seen situations where advisors are asked to sign a non-compete agreement (rather extreme!) that restricts them from giving advice to similar companies during the relationship or for a certain term after their relationship with the company ends. I have also seen assignment-of-invention clauses which require the advisor to assign any technology that he or she develop during his or her relationship with the company. Of course, this is limited to the particular sphere of business of the company. 

In sum, advisors can greatly help the founder or the founding team get some direction on where they want to take their business, building their core product and gaining some traction in the marketplace in terms of contacts and strategies to reach out to customers. Bringing on the right advisors can be critical to the success of the company. To be effective, advisors must be privy to confidential information and to certain facets of the start-up. A company should make sure its advisors are bound to the company by certain agreements. Once a company thinks it has that special advisor and wants to take that next step – it should call a start-up lawyer and run through the necessary risk analysis first. This is a smart move.

If you are willing to dedicate your time, energy, and brainpower on starting a venture and you see yourself taking your idea the distance, you will invariably face many uncertainties and uncontrollable risks. The risks you face and the choices you make will dictate the success of your venture. You owe it to yourself, your co-founders, and your venture to deal with your manageable risks now so that you can concentrate on making your venture a success. Incorporation or the choice of an alternative business entity is a first step down that path.

Years ago I worked with a client for whom everything had to be done ASAP. He would put ASAP in the “re” line of every email. Soon he discovered that if everything was ASAP then nothing had priority. So, he took to putting exclamation points after his ASAPs, something like this “ASAP!” In fact, he had a system of multiple exclamation points. Sometimes he wrote “ASAP!” and sometimes he wrote “ASAP!!!!” and sometimes it was somewhere in between. Needless to say, this habit provided a ready source of humor around the office and did not change behavior one little bit.

My discovery is that ASAP doesn’t mean much. If the task is a simple one step task ASAP might work, as in “Please mail this letter ASAP.” Otherwise forget it. Keep in mind I said “might.” Did I mean right now or before the close of business? Or, some other time? 

I like to have a specific time when a project is due and buy in around that time. I also like to have progress check-in points. This increases the likelihood of completion but does not guarantee it. On top of that there is the friendly drop-in and check as I pass an office. Think of it as the water torture – you are going to see a lot of me until it is done. It turns out that the “drop and check” works.

In the category of actions speak louder than words, “ASAP” doesn’t say much no matter how many exclamation points you put after it. A quick stop and a polite ask on your way to the coffee machine says its on your mind.