Click here to bookmark Clausehound and search for clause/contract language

Choose from our expert-compiled document frameworks and customize from a vast library of clauses.

Survival Gear: Making the Confidentiality Clause a ‘Survivor’ of the Employment Contract

The Jungle

For most of us, the toughest ‘jungle’ we will have to learn to survive in is the world of employment. Most of us will not win a $1 million prize by being crowned the Sole Survivor on the popular show Survivor – we will have to earn our $1 million day by day at work. And unlike the rules on the TV show, it takes more than personality conflicts to snuff out our membership in the workplace ‘tribe’ in which we find ourselves. This is demonstrated in the following case, Gillespie v. 1200333 Alberta Ltd. [2012] ABQB 105, cited at http://www.canlii.org/en/ab/abqb/doc/2012/2012abqb105/2012abqb105.html.

 

The business world’s toughest challenge is to survive each day.

A few years ago, an employee was fired because of ‘personality conflicts’. She cleared out her desk and left. Later it was discovered she had taken home some papers which contained confidential personal information of some of the employer’s clients. This violated the confidentiality agreement.

She sued the employer for wrongful dismissal and claimed 4 months’ wages in lieu of notice. The employer argued in defence that she had breached the confidentiality agreement and so her termination was justified. On appeal the court held that at the moment she was fired they had no cause to fire her because she had not yet breached the confidentiality agreement. She was awarded the 4 months’ wages.

 

The Challenge

Why didn’t the employer claim for a breach of the confidentiality agreement? Why did the employer rely only on defending the wrongful dismissal suit?

When an employee is fired, the employment contract ends immediately. This means that if the confidentiality agreement was contained in the employment contract, it would no longer bind the employee as soon as she/he is fired. So in this situation, as soon as she was fired, and then cleared out her desk, she may no longer have been bound by the confidentiality agreement.

This is troublesome for employers, who need protection for confidential information for at least three reasons: to comply with privacy protection legislation; to protect their own confidential information; to comply with agreements with their clients to protect the clients’ confidential information.

What is an employer to do?

 

The Survival Gear

Can an employer make the confidentiality obligations ‘survive’ the employment contract? Yes!

The legal survivor gear is called a ‘survival clause’, and typically says something like this: “Notwithstanding any other provision of this Agreement, the Confidentiality Clause shall survive the termination of this Agreement.”

While some survival clauses are more detailed, and some contain definite periods of time for which the named obligations will survive the termination of the agreement, the key feature is that the survival clause clearly identifies which obligations are to survive.

Why didn’t this employment contract contain a survival clause? In the rush of a busy practice, it is easy to overlook what most people call ‘boilerplate’, and to underestimate the significance of one missing clause.

You can check out our gap highlighting tool as a way to minimize the risk of missing important ‘little’ clauses like the survival clause.

 

Do you have the legal survival gear you need to make it to the top?

 

In reality, the survival clause is not ‘just boilerplate’ – but like the immunity necklace on the show, Survivor, it makes all the difference. If our employer had included a survival clause in the employment agreement, and this survival clause had clearly covered the confidentiality obligations, this ‘episode’ might have had a different ending.

 

Takeaways:

  • the termination of an employee cannot be justified by events that happen after the employee is fired
  • confidentiality obligations will end when an employee is fired unless the employment contract contains a survival clause
  • the survival clause must clearly identify the obligations which are to survive the termination of the contract

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.

Read more...

Designer Labels and Legal Fashion: Don’t Be Fooled by Appearances

We see what we expect to see, and the fashion industry has been making $ billions exploiting this principle. Who wants a lawyer in a ripped pair of jeans – unless the jeans have a designer label, an expensive price tag, and are seen in fashion magazines? Better yet, we want our lawyer to look like they could star in Suits! In the world of fashion, the label changes everything.

We want our lawyers in suits that make them look like the lawyers in Suits.

 

In the world of legal (drafting) fashion however, it is common for agreements to contain the following type of clause: “The insertion of headings is for convenience only and shall not affect the interpretation of this Agreement”. This is the fashion equivalent of saying: ‘Don’t pay attention to any of the labels, or advertising, just look at the product for what it is worth’.

 

Lawyers, being human, will of course look at the headings, and must resist being influenced by them. You can check out our gap highlighting tool as a way to minimize the risk of being deceived by headings!

 

To test how powerful legal labelling can be, try the following experiment:

 

  1. Read the following clause very quickly, as you would when skimming through a long document.

 

Confidentiality of Agreement Itself:  The Parties agree that the information obtained in connection with the negotiation and execution of this Agreement or the effectuation of the Purpose, including any information provided in accordance with the Agreement, shall be deemed to be Confidential Information and governed by the terms of the Agreement.

 

  1. Close your eyes and classify what ‘type’ of clause it is. Don’t peek or cheat by rereading the clause.

 

  1. Open your eyes and look at the clause carefully now. Did you correctly interpret the clause, or were you influenced by the heading? Be honest!

 

  1. Try the experiment again, with the second clause.

 

Non-Competition: The Contractor will not directly or indirectly, for itself or on behalf of any other person, partnership, corporation or other entity, solicit or attempt to solicit, for the purpose of engaging in competition with the Corporation, any person or entity whose account was serviced by Contractor on behalf of the Corporation during the term of this Agreement. This clause shall apply during the term of this Agreement and for 2 years after any termination of this Agreement.

 

If you were even tempted to mislabel either clause, you have just experienced the power of the label. If you have wondered how to dress like the guys in Suits, you are thinking of making the power of the label work for you.

What would you expect from a lawyer labelled in clothing like this?

 

Do the same in your legal work – don’t trust someone else’s labels, and make sure yours are accurate and work for you.

 

Takeaways:

 

  • don’t rely on headings when reviewing a legal document
  • be careful to add accurate headings when drafting a document
  • legal technology can minimize risk and assist with accurate document comparison

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.

Read more...

Why Hire a Lawyer When I Can Download an Free NDA Draft from the Internet?

“You get what you pay for” is a common expression, but when it comes to downloading free contracts from the internet, the chances are good that a ‘free’ do-it-yourself contract could turn out be very expensive in the long run.

 

Picking out an internet contract for a DIY project is a little like choosing from a box of chocolates you have never seen before, where each chocolate has a name, but no description. Let me give you some chocolate analogies for the various free NDA’s I have found on the internet.

 

Free NDA #1: The Chocolate Swirl

This glossy chocolate covered temptation promises a rich chocolate experience…until you bite into it. Then you discover a coating of chocolate much thinner than you were hoping for, and a marshmallow interior rather than the liquid chocolate the wrapping suggested.

 

The ‘Chocolate Swirl NDA’ was entitled “Mutual NDA with Non-Compete”. One of the clauses was titled “NON-COMPETE.”, but the language which followed was not a non-compete clause. It dealt with preventing the solicitation (or ’poaching’) of employees of either party. Reliance on the titles in this contract without the guidance of a lawyer or a document comparison tool, would leave you without the protection of a non-compete clause.

 

Free NDA #2:  The Raspberry Supreme

Surely a confection named the ‘Raspberry Supreme’ would be safe for those with an aversion to nuts? Wrong! This one has tiny pieces of almonds embedded in the raspberry filling, like tiny traps for the unwary.

 

delicious-196919_640

 

The ‘Raspberry Supreme NDA’ contained some potential dangers for the unwary, including a definition of confidential information that was limited to documents marked ‘Strictly Confidential’, or to oral disclosures set down in documents marked ‘Strictly Confidential’ within 10 days of the disclosure. Unless employees are informed of this requirement, and reminded frequently of it, the risk is especially high that information disclosed orally might not be protected under the confidentiality clause.

 

Free NDA #3: “The Fudge”

Each fudge lover has their favourite flavour…chocolate, butterscotch, vanilla, maple…but in this box of chocolates, the fudge experience is inconsistent because some identical looking fudge squares are chocolate, some butterscotch some maple….there is no predicting what you will get.

chocolate-283669_640(1)

The ‘Fudge NDA’ had several clauses dealing with disclosure to representatives, and each one was slightly different and slightly inconsistent with the others.

For example, one clause permitted disclosure to representatives only on a ’strictly need to know’ basis; another clause permitted disclosure to representatives with no restrictions; a third clause permitted disclosure to representatives only after obtaining written permission.

 

While it could be possible to read these clauses together, it is important for a recipient of confidential information to be very clear which representatives can have access to that information without risking a possible breach of the NDA, or resorting to a severability clause in a later dispute.

 

Conclusion

Just as experience teaches chocolate lovers what to expect from a box of chocolates, so it is that experience enables lawyers to assess whether an NDA is suitable for your particular situation. Without legal experience or a legal gap analysis tool to assist you, the ‘free internet contract’ might not be a good choice.

 

Takeaways:

  •         free internet contracts might not be suitable for your situation
  •         be wary of relying on titles or clause headings – they may not be accurate
  •         pay close attention to the definition of confidential information     
  •         be wary of including multiple clauses that deal with the same topic

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.

Read more...

The New Age Articling Student – Using Legal Technology to Learn and Draft More Efficiently

“How has legal technology affected you?” This is the third perspective in a three part series.

 

A few days into my articling term I received my first contract to draft – a commercial lease agreement. I had only seen this type of agreement a few times before. But I was full of ambition to learn the ins and outs of the agreement, so I began by doing what every lawyer does first and began to look at previous commercial lease precedents that my firm had, and within half hour I had my whole desk covered in different leases, it didn’t look pretty!

 

The stacks of precedents I had to read through!

 

I started looking at the different language between the agreements and the different clauses that existed. I learned pretty quickly that commercial leases can be vastly different from one another, and some of the leases were as long as forty-five pages. The task in front of me was to dig through these agreements and find the most suitable language and clauses that I could use and tailor to meet our clients’ requests. However, finding the differences by manually looking through all the leases and reading hundreds of pages was incredibly time consuming. I worked diligently the next couple days and eventually provided my principal with my draft of the commercial lease; however it was only minutes before his deadline. In my first week of articling I realized very quickly how much work goes into drafting an agreement.

 

As my articling term went on my drafting skills became faster and more efficient. This was due in large part by using legal technology software to help speed up the drafting process. The days of having my desk covered in leases and trembling to avoid a paper cut were almost extinct. I was able to save a significant amount of time with the following tasks:

 

  • Locating precedent documents
  • Extracting clause language
  • Explanation of clauses
  • Variant language for each clause
  • Gaps/differences between agreements

 

If you’re an articling student or a lawyer your eyes probably opened wide after seeing this list. One of the legal tools I used to do this was a beta-testing tool called Clausehound. Clausehound stores thousands of clauses within its database and provides comments on core concepts. As an articling student at the beginning of my legal career I did not understand the meaning and function of each clause, and it was difficult predicting the real impact it would have on an agreement. Clausehound saved me a lot of time, and saved my principal from a lot of (likely annoying) questions about the meaning of clauses. While other websites provide legal tools, Clausehound provided templates as well as case law examples for many clauses, and had dozens of additional variant language options as well.

This was great as I could see the different ways the clause could be drafted, and this gave me more flexibility when I was drafting.

 

There are many cloud based options for firms to store their precedent documents. This reduces time spent searching through cabinets, boxes and folders to find what you need. To be able to find precedents from years ago with a click of a mouse is invaluable in our field. I found that Clausehound added additional value over a typical cloud based portal, because the secure Clausehound portal breaks down each uploaded agreement into clause categories and stores them for the firm’s easy access.

 

The best tool I found online, that doesn’t appear to exist anywhere else is Clausehound’s document comparison tool (currently in beta stage for NDA’s). The tool compares two documents against each other and allows you to quickly see the differences between the agreements. For every agreement I worked on, I could see the client’s agreement compared against another and see all the gaps/clauses it was missing!

The Clausehound drafting interface with clearly laid out sections.

 

Although I have much to learn and have just embarked in my legal career, Clausehound’s tool and other legal drafting tools are allowing me to understand agreements, and draft more efficiently.

 

As an articling student or a young lawyer, you are always trying to impress and get your work done on time, and cutting edge legal software definitely helps!

 

Stay tuned for further updates about cutting edge legal software!

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.

Read more...

Started from The Bottom: An Articling Student’s Legal Drafting Experience using a Document Comparison Tool

“How has legal technology affected you?” This is the second perspective in a three part series.

 

In law school, my contract law course taught me all about the basic requirements that make for a valid contract:

  • offer:
  • acceptance;
  • consideration; and
  • meeting of the minds.

These requirements are obviously important to the drafting of a contract, but my contract law course failed to teach how to actually draft a contract.

Just as my academic life ended my legal career life began. Being a freshly graduated law student, I began applying the knowledge collected over the never-ending law school years into a fast-paced demanding environment.

The first nerve-racking interview as a fresh law graduate!

 

An articling student usually drafts contracts based on the precedents that senior associates have collected over the years of their career. Obstacles I experienced as a fresh grad, and new students often face in drafting legal agreements include:

  • how to make sense of variant language and clauses in agreements;
  • how to look out for potential issues in a complex agreement being reviewed; and
  • how to point out what important language is missing from the agreement.

At the beginning of your articling term, who would think that a clause as general as severability could be vital to an agreement? How do you know, off the top of your head, what exclusions to include in a confidentiality clause? What if, on top of having to understand general clauses, you also need to customize the clause to the client’s needs?

 

The pressure is real, while also meeting strict deadlines from clients.

 

The high-demand articling term which all law students love to hate is preparation for the real legal world. Many senior peers push their law students to get into the habit of handling their own files by the end of their term – a way to prepare them for the associate life. This expectation can be quite stressful for a student, especially where they are drafting or reviewing agreements without fully understanding the importance and repercussions of each clause. This is where innovations in legal drafting come in handy.

As I come close to the end of my articling term, I have gotten familiar with understanding the background of the legal documents I draft on a daily basis, with the help of online legal drafting and research tools. Piloting legal technology, such as Clausehound, has taken my articling experience one-step further by maximizing my understanding of various agreements’ frameworks and the importance of variant language.

For example, I often work on ‘parsing’ or ‘mapping’ non-disclosure agreements in order to determine gaps missing from a client’s standard non-disclosure agreement. Generally, the client wants to know what is missing from their agreement and why it’s important to include. At the click of a button, Clausehound can:

  • display what ought to be in the non-disclosure agreement;
  • iterate summaries of each clause’s purpose;
  • draft missing language to include in my client’s non-disclosure agreement; and most importantly
  • build a library of my very own, that will be available to me for the life of my career.

It has been argued that these technological tools will eventually put us out of work. However, I think that with the help of technological advances in the legal industry, we now have the ability to speed up the development of our legal drafting skills. The legal drafting skills I have learned in a few short months, by utilizing legal software tools, are skills that would generally require months of an associate’s training and supervision.

Technological tools also give a competitive advantage for years to come. It takes a great lawyer many years to develop a library of ‘tight’, well-drafted legal agreements and their customized ‘style guide’. I’m sure I will have a deep library of legal knowledge to assist in future drafting and reviewing of various agreements while taking advantage of legal software compatible with cloud technology. I also get to develop hands-on legal software skills simultaneously with learning the legal profession – killing two birds with one stone!

 

By utilizing legal software tools, the process of drafting contracts can be vastly sped up.

 

As articling students, we are entering into a profession that has historically been bound by tradition and resistance to change. But the legal industry is changing, and as we prepare for the disruptive innovation storm, it is important to embrace technology instead of avoiding it. Rather than being a threat, legal technology tools can guide you into becoming a stronger legal drafter and expand your knowledge of the law for your client’s specific needs.

 

Stay tuned for the third blog in this series, to learn how an articling student has adapted in his work environment by using legal technology.

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.

Read more...

1982 – Legal Technology Compared to Document Drafting with Typewriters… Memories of a Techno-dino…

“How has legal technology affected you?” This is the first perspective in a three part series.

1982 – some of you were not born yet in the year I began my legal career as an Assistant Professor at Western University.

You will likely have difficulty imagining that all legal research was done manually with books and loose-leaf  research services, and that proximity to a physical law library was essential. One law librarian at Western told me a few years ago that they think there are law students who graduate now without ever having set foot in the library. Imagine that!

 

“Yes, this is the loose-leaf I am referring to”. Image by Addedentry via Wikipedia.

 

You would also have difficulty imagining that all documents were typed manually, or photocopied and cut and pasted together and re-photocopied, and that we used gallons of ‘white-out’ in the drafting process. Document comparison was a nightmare. Everything was done manually – no blackline comparisons with 5 clicks of a mouse! In 1983 I was only the second Faculty member to own a personal computer. We had to boot up manually in DOS, and insert the floppy drive – and there was no automatic ‘save’ to backup!

 

“Going through 20-page documents on this was a nightmare”. Image by Ruben de Rijcke via Wikipedia.

 

Those of you who are ‘experienced’ enough to remember those times know how much times have changed! Today we have a world of research available at our fingertips. Word processing software and online drafting tools (such as Clausehound, which I am helping to build) have revolutionized the drafting process. Innovative services (such as Clausehound’s Small Business Law Library) have made it possible to mechanize document comparison, saving hours of labour. Other software packages have created efficiencies for everything from accounting to file management.

Fast forward 30 years…. After a decade as a full-time member of Western’s Law Faculty, I resigned to raise our family, and pursue other business interests. When I resumed my legal career, technology – and the legal profession – had changed to permit me to work from home.  This is what has excited me the most about legal technology innovation.

Colleagues at work now know me affectionately as the “techno-dino”, and have generously transitioned me into the 21st century. If I can do this, anyone can!  In fact, if you are serious about starting your own or growing a legal services business, you must consider the “new law environment” and think about how to use technology opportunistically.

With teleconferencing, video conferencing, chat messaging, cloud document and file storage, and of course email, legal professionals can work in a virtual office environment.

It makes no difference if our colleague is in the next office, on the floor above us, or in a city 2 hours away – we are all in “e-contact” at all times. This enables the right talent mix to come together, even if that talent does not all live in the same city. This is true for building a firm, or for putting a team together for a particular transaction. Clients are also following this pattern. They are saving time and money by ‘e-meeting’ with their legal advisors when possible, and by staying in contact even when they are out of the country.

To survive and thrive in this changing legal landscape, lawyers need to ‘think outside the box’ and use technology to support their efforts to deliver quality legal services to their clients. While nothing replaces top notch legal talent (I too find it hard to believe that robots will replace lawyers anytime soon), mechanized drafting and document comparison tools, along with quality research tools can save labour, freeing up talent for more customized client needs. These tools can also help the smaller firms compete with larger firms.

Do you remember 1982? If you don’t, you still need cutting edge legal tools to be competitive. If you do remember 1982, do not be afraid of the changing technology – embrace and use it to your advantage. By following this advice, I now find myself in the exciting position of working on the cutting edge of legal innovation!

My colleagues who have affectionately anointed me as the techo-dino have also written the second and third blogs in this series.  Take a quick peek and see how they, as articling students, have capitalized on some of the latest legal technology.

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.

Read more...

Paying with Shares: The Employee’s Perspective

Introduction

What makes a stock option plan or agreement attractive to an employee? The short answer is – the opportunity to make money!

 

There are three basic ways for an employee to make money on the shares: via dividends; by selling the shares for more than they paid for them; or by participating in the value of the company if it is liquidated.

 

Dividends

Frequently dividends are declared “at the discretion of the Board of Directors”, which means that the shareholders will get dividends if the Board decides to declare dividends. Often dividends are also not ‘cumulative’, which means that if the Board does not declare dividends in a year, there is no carryover of rights to dividends from that year’s profits in any following year. To make it more likely that employee shareholders will receive dividends, their dividend rights should be tied to the dividend rights of the shareholders who control the company.

This can be done in various ways. The ‘employee shares’ could have the right to dividends if any dividends are declared on the shares of the controlling shareholders. Another possibility is to make dividends on the shares of the controlling shareholders payable only after dividends on the ‘employee shares’ have been declared and paid.

 

Sale of the Shares

For private companies, especially startups, the employee will likely only be able to sell their shares in one of two situations: to the company under a share repurchase agreement; or to a purchaser making a bid for the company. From the employee’s perspective, it is desireable to be able to require the company (at the employee’s discretion) to repurchase the shares for the price paid plus undeclared dividends (at a minimum). From the employer company’s perspective, it is desireable to be able to repurchase the shares (at their discretion) or if the employee leaves the company, or upon defined financing events.

 

If a purchaser is making a bid for the company, the employee will want to have the right to participate in the bid to be able to sell their shares for the same price offered to the controlling shareholders. The employee will also want to have an acceleration provision in the stock option plan which permits all the options to vest immediately upon an offer to purchase the shares of the company. This would enable the employee to purchase all the shares under the plan at the exercise price, and sell them into the bid.

 

Liquidation Value

The right to participate in the liquidation value of the company is an opportunity to participate in the growth in value of the company.

From the employee’s perspective, it is desireable to have shares that participate equally with (or in priority to) the common shares.

 

The Worst Case Scenario for the Employee

From the employee’s perspective, the worst combination of rights are shares that have only discretionary dividend rights without any preference over or ties to dividends on the owner’s shares; shares that can be repurchased at any time for the price paid by the employee (plus declared but unpaid dividends, if any were declared); and shares that do  not participate in any ‘liquidation event’. These shares will bring only the repayment of the purchase price, no guarantee of dividends, and no right to participate in the growth of the business. Worse yet are shares that the shareholder may never be able to sell or receive dividends on!

 

These types of shares are like an interest – free loan to the company, and will not likely create any incentive or loyalty to the company for employees who understand the risks – and potential rewards- of working for a startup.

 

Takeaways:

  • employees will want dividend rights that require dividends to be paid to them when dividends are paid to the controlling shareholders
  • employees will want to be able to require the company to repurchase their shares
  • employees will want to have the right to sell their shares at the same price as the controlling shareholders if a bid is made for the purchase of the company

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.

 

Read more...

Paying With Shares: The Employer’s Perspective

Links from this article:


Introduction

Your startup is thriving but you still have more goodwill than cash, and you need to retain your talent. You can’t afford to raise their pay – what can you do? Many companies in this position “pay with shares”, that is, they offer options to their employees to purchase shares in the company in lieu of offering them a raise.

 

How Does this Work?

Employers can set up a detailed Employee Stock Option Plan (ESOP) if they expect to be giving options to several employees, and can create a separate class of shares for this purpose. If only one or two employees will be involved, a simple Stock Option Agreement can be used, however it is typical for the employer to also require the employee to sign a non-disclosure agreement (NDA) as a condition of the purchase of shares.

Under the ESOP or Stock Option Agreement, the employee is granted options to purchase shares, but will not become a shareholder until they exercise the option and purchase the shares. The employee will be offered a fixed number of options that will ‘vest’ according to a timetable eg. ⅓ of the options on January 30 for each of the next three years. The plan or agreement will usually provide that If the employee does not exercise the options, the options will expire on a fixed date, often 3 to 5 years after they were granted.

 

What Type of Shares Should be Available for Employees?

There is no ‘one size fits all’ answer to this question. The answer depends upon the unique share structure of the company and the reason for offering shares to the employee. Three basic rights can be attached to shares, but not all shares need to have all three rights. These rights are voting; dividends; and sharing in the proceeds of the liquidation of the company.

 

Most employers do not want employee shareholders to alter the balance of voting rights in a private company. The solution is to either offer employees shares without voting rights, or require them to enter into a voting trust agreement as a condition of exercising the option. Under  a voting trust the votes attached to the shares would be exercised by a trustee nominated by the company.startup

 

Employers are also often concerned about maintaining flexibility in their share structure so that future financings are possible and won’t be blocked by the existence of employee shareholders.

This flexibility can be maintained by providing a mechanism for the company to buy back the shares under certain conditions.

 

If the purpose of employee stock option plans are to give employees an incentive to maximize the value of the company, giving employees the opportunity to participate in the growth of the future value of the company is important. This can be accomplished by granting them options for shares that have the right to participate in the liquidation of the company, or which have the right to be included in any offer to purchase the company.

 

Of course, the particular combination of rights suitable for your company will depend on many factors. Your accountant and lawyer will be able to advise you on how best to use your corporate structure to ‘pay with shares’.

 

Takeaways:

  • stock option plans/agreements can be used to reward or incentivize employees when cash is tight
  • the rights attached to ‘employee shares’ should match the objectives of the stock option plan and should be designed to maintain flexibility for future company financing

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.

Read more...
Additional Rent Announcements API Approval of Terms Asset Purchase Agreement Background Intellectual Property Board of Directors Business Case Law CASL Clausehound Collaboration Commercial Lease Confidential Information Confidentiality Consulting Agreement Contract Drafting Contract Negotiations Corporation Costs and Expenses CPD Definition of Intellectual Property Dispute Resolution Distribution Agreement Employee Employment Employment Agreement ESOP Events Farming Law Generally Used Clauses Grant of Licence Handling of Confidential Information Indemnity Independent Contractor Independent Legal Advice Informal Discussions Intellectual Property Investor Journey Licence Restrictions Limitation of Liability Long Form Marriage Contract Master Services Agreement NDA Non-competition Not for Profit Articles of Incorporation Notice of Arbitration No Waiver Obligations Ownership of Intellectual Property Ownership of Work Product Parties Partnership Prenuptial Agreements Privacy Policy Product Sales Agreement Purpose Representations and Warranties Restrictive Covenants Safeguarding Requirements Settlement Agreement Shareholder Agreement Software Development Start-up Subscription Agreement Technology Termination Term Sheet Terms of Use Trademark Registration Transfer of Intellectual Property Waivers and Releases Website Terms of Use
Show All Tags