One of the key contracts drafted during a fund raise is an employment agreement for the founder of the company undertaking an equity fund raise. Much has been spoken about the term sheet and the shareholders agreement; however interestingly, a number of times, the employment agreement gets executed only after the agreement to buy the shares and the shareholders agreement are executed, which can significantly impact the founder’s ability to negotiate!

From the standpoint of the founder, it is important to understand that the economics of the deal are also tied in with his / her employment terms since this practically impacts how his / her role and obligations will pan out after the investment.

While there are a number of aspects that founders need to consider and introspect in relation to a fund raise, the focus of this article is limited to discussing the termination related provisions for the founder as an employee of the company that they have built with much sweat and toil.

Scope of a founder’s ability to walk away as an employee

Intuitively, a founder as the ‘owner’ of the company is used to a certain sense of ‘autonomy’ and hence, he/ she needs to understand that after a funding round, his / her terms of employment would be significantly altered. In this regard, as a founder, in addition to your compensation, you should carefully understand clauses which state when you can walk away from your company, if required, or when can the company terminate your employment. After all, you should keep in mind that the investment has happened with you as the backbone and hence certain restrictions are provided in this regard under the shareholders agreement and the employment agreement.

Typically, a founder is locked in the company as a shareholder till the time the investor exits the company (subject to a few exceptions permitting sale of shares for liquidity purposes or estate planning). As an employee, the founder can leave the company without repercussions (more of this is discussed below) only in case of a ‘good cause event’. This ‘good cause event’ is usually limited to cases of death or disability or in certain cases, depending upon the stage of funding, may include other events such as significant reduction in the role / compensation of the founder as an employee. On the other hand, if the founder intends to leave the company ‘without cause’ (which is for any reasons not included as a ‘good cause event’) including simply because he / she plans to ‘move on’ from the company, he / she may do so subject to certain repercussions.

The key repercussions for the founder typically include loss of shares held by him / her (which may be bought back by the company or the investor at a discounted price) along with loss of certain rights of the founder in the company (management rights and certain rights as a shareholder to appoint directors etc.).

On a related note, there are a number of other cases which trigger the aforementioned consequences. For instance, such repercussions also apply in case of ‘under performance’ of the founder and/ or the company, which is a very subjective matrix. Such repercussions may also apply in cases of fraud by the founder, commission of a criminal offence by the founder etc. which, though are objective in nature, are still vehemently debated while finalizing the fine print (for instance, is a chargesheet enough or is conviction for the criminal offence required to trigger these consequences)?

On the other hand, in subsequent rounds of fund raise, the employment agreement may provide for removal of the founder as an employee by the company ‘without reason’ upon serving a 60-90 day prior notice by the company. While the founder should push to set out objective criteria for his / her termination as an employee, in the event the ‘without reason’ criteria is agreed upon, he / she should at the least ask for a certain number of shareholders or their nominee directors to approve such proposal for termination along with the removal of various restrictions and obligations set out under the shareholders agreement for the founder such as restrictions on the founder to freely transfer his / her shares, obligations on the founder to provide the investors with an exit etc. After all, you may not want to be in the company as a shareholder if the company (and its other shareholders) have sought for termination of your employment.

Concluding Remarks

Fund raising is an important milestone for any entrepreneur. However, the fine print should be read thoroughly and the expectations should be understood correctly. This article provides an overview of what the founders should expect in respect of continuity of their role in the company that they have built but there is no ‘one size fits all’ approach to negotiate such provisions and different repercussions may apply to different  trigger events  depending upon factors such as the stage of funding and how such provisions are negotiated (for instance, in a late stage round, the founder may be in a better position to negotiate some of these terms). Accordingly, understanding such terms and negotiating them correctly is relevant at every round of funding since the terms agreed in the previous round form a guiding principle for the negotiations in the subsequent rounds as well.

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