I once had a start-up with my dear ex-friends. At the beginning we had great plans for the company’s opportunities. In our most enthusiastic moments, we could almost feel the fortunes that were about to change our lives forever. The only issue that we really did not pay enough attention to was that we were about to enter into foreign markets without any practical management knowledge, local managers or even employees.
So what we did was that two of the founding partners (not me) moved to this foreign country, and started to manage the business and work for the company. Everything went well at the beginning and very soon we needed to hire three new employees that we considered at that time to be the most talented ones in the respective business and have the best contacts to safeguard our growth plans.
However, there is always a but. It did not take that much time before the rest of us staying in Finland realised the cold fact that our management was in fact very poor, we were doing all the mistakes you can possibly imagine, the employees we hired were found from a local gym and they were more interested in continuing their old lives with former employers than working for us. Simultaneously we were burning cash like there was no tomorrow. At a certain point, we reached the level where without additional funding all the glory would have been gone in a couple of weeks leaving behind nothing but devastation to our personal economies.
At that point we decided to change the management (my friends at that time) as well as the employees. All the fun was simultaneously gone. Slowly but steadily we were able to reach the break-even which enabled us to sell the company to our competitor at a price where there were no winners or losers. Now, many years afterwards, looking back the whole project was nothing but a waste of time.
The only thing that saved ourselves and the company from going bankrupt was a well drafted shareholders’ agreement when we all were still friends. In addition, we were able to change the undesired management and employees to better ones, again thanks to the comprehensive manager and employment agreements.
My colleague Antti Hemmilä has already touched the issues around the shareholders’ agreement in his previous blog in May so I will focus on the most important issues regarding the manager agreements. The same principles obviously apply to the employment agreements, too.
Here you go, “the must” issues to be included in the manager and employment agreement.
Always agree in great detail on the various duties for which the manager or an employee is responsible. Especially in situations where your organisation is not performing, it is the employer who needs to prove which duties or obligations are breached or not fulfilled. Without exact definitions in this respect, the burden of proof might be impossible to fulfil or the corrective actions may require so much time that the consequences of the breach are far worse than what can be saved. Also remember to agree on a trial period which, in most cases, can not exceed 4 months. And never forget to agree on the reporting chain (that can be changed from time to time) and more importantly, that the employee must work for you fulltime (if so wished) and that no such side-hobbies are allowed that may have an adverse effect on the manager’s or employee’s performance.
It is required by law that a manager or an employee must receive some kind of remuneration for his or her work. Otherwise the relationship is not regarded as an employment relationship. Even though the legislation does not set any minimum requirements in this respect, the collective bargaining agreements that are generally applicable to the IT sector include several provisions about the minimum pay, mandatory salary increases and holiday bonuses.
In case you would like to get the most talented individuals working for you and keep them in the house, the monthly salary (even a good one) is in most cases not enough. At this point, different bonus and option schemes shall pop up. There is no employment related legislation in respect of bonus or option schemes in Finland compared to e.g. Denmark, where the employment related stock options are regulated by law. The lack of legislation gives the employer a great freedom of contract but simultaneously also exposes it to great financial risks in case there are no possibilities to change the bonus schemes in the ever changing financial environment. As for the stock options or shares, it is advisable to agree on their different kinds of vesting and redemption issues in case the employment is terminated due to various reasons. In this respect good leavers are generally treated more fairly than bad ones.
3. Confidentiality and IPR
This is obvious. The legislation gives certain comfort about the confidentiality during the employment, but does not state anything about the confidentiality after the employment has expired. The only legislation-based post-employment confidentiality obligation exists in the Criminal Act, but that’s another story. Thus, in order to protect your business secrets, it is crucial that the confidentiality obligation is agreed widely upon and extended also after the employment. The same applies to the IPR’s. It is obvious that the work related inventions belong to the employer against reasonable compensation, but how about inventions, copy rights etc. that are created at home or do not relate exactly to the employee’s duties? The answer to this question is not simple in case the employment agreement is silent about the IPR.
In IT sector, where the business is mainly based on knowhow, this should also be obvious. However, I see on a daily basis manager and employment agreements that do not take any position to this matter. Non-competition obligation is relatively well included in the legislation during the employment, but the post-employment non-comp obligation must always be agreed upon during the employment in order for it to be effective. Depending on the business secrets and the position of the manager or an employee, the length and scope of the non-comp obligation may vary as well as the possible sanctions in case of a breach thereof. In ordinary situations the maximum length of this restriction for an employee is 6 months without any additional pay. Should you wish to extend the period up to 1 year, the employee is entitled to receive reasonable compensation from the 7th month onwards. This reasonable compensation per month is app. 50% of the monthly salary. These limitations do not apply to managers.
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Finally, there are many other issues to be agreed on in the manager or employment agreements. My advice has always been that you should agree also on the difficult issues before they escalate. After that point, they will change to impossible ones and may lead to severe consequences for your business or even devastate it. Not everyone is as lucky as I was when I managed to keep my feet dry.
About the Author
Jani is a Specialist Partner and a head of Attorneys at law Borenius‘ Espoo office which provides comprehensive legal services for technology-oriented companies in their early and growth stages.
Jani advises international and domestic clients in various commercial disputes, arbitrations and criminal trials having concentration in all areas of employment law including also working safety and discrimination issues and immigration matters. Jani has also vast experience in negotiating and drafting shareholders’ agreements, employment and executive agreements, policies and procedures and conducting in-house training for employers confronting a wide range of employment law matters including, inter alia, downscaling, reorganisations and redundancies. Jani is also a frequent speaker and lecturer in employment law issues in domestic and foreign seminars.
Attorneys at law Borenius Ltd is one of the leading law firms in Finland offering a full spectrum of commercial law services. Attorneys at law Borenius’ mission is to be the most hands-on, client-centred business solution provider. The firm’s approach to business challenges is team-oriented, combining its strong and diverse expertise with a thorough business understanding.
This post is part of the series of posts with Attorneys at law Borenius: The Road To Exit.
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