

Employment contracts: What are they good for? - rudd
http://37signals.com/svn/posts/2239-employment-contracts-what-are-they-good-for

======
mattm
Some advice I once got about contracts:

If you have to go back to the contract and start telling the other person "The
contract says you would do X", then the relationship is already screwed up and
it is almost beyond repair.

~~~
hga
That's a _little_ extreme.

Contracts are good for memorializing simple numeric facts like "you get X
shares vested in this way on thus and so date". Much better than depending on
the memories of even scrumptiously honest people.

The assignment of IP part is also important, at least when I learned this in
the '80s. Makes it crystal clear that the employee is doing work for hire and
has no copyright interest in his code or whatever.

As noted elsewhere, this is easy to put in one page and you should strive to
do that. "Just the facts, Mam".

------
grellas
Most Valley startups use a one-page "letter offer" type of agreement, which
works well and which need not set a wrong tone of "we don't trust each other."

In addition, there is always an "inventions and confidentiality" type of
agreement that: (1) clarifies the employee's confidentiality obligations; and
(2) makes clear that all IP generated by the employee belongs to the company.

In purely technical terms, under California law, you could actually skip both
these documents because the default relationship is "at will" and normally can
easily be terminated by either party if it does not work out and because the
law automatically says that inventions conceived by employees in the course of
performing their duties belong to the company and not to the employee.

Why not keep it simple, then?

Of course, any company can choose to do so.

But:

1\. If compensation is not in writing, you can get claims of the "I took
reduced pay because I was promised x percent of the company" variety.

2\. If an employer does not take prudent steps to show that it is keeping its
trade-secret information confidential, the law can find that it is not really
protectable trade-secret information after all, thereby potentially
jeopardizing the company's right to protect it from theft by any employee.

3\. Usually the employee is given an option grant and any promise relating to
equity should always be hedged by statements like "this is subject to approval
of our Board of Directors" and "terms of the grant will be governed by our
option plan and standard option agreement" - and followed up by a signing of
the formal stock option agreement (among other things, if you don't have such
documentation, your ISO classification of incentive options is jeopardized and
the employee will miss out on whatever tax benefits such a classification
provides).

4\. People do make things up when disagreements arise and it is very prudent
to have at least a basic document that specifies exactly what the relationship
was in order to avoid problems (perhaps this could be solved by the globally
posted employment policies that the articles alludes to).

5\. Finally, some forms of compensation are incentive-based, e.g.,
commissions, and it is a serious mistake to agree to such arrangements
verbally without clarifying such basic issues as "to what does the commission
apply," "is there a tail on it if employment terminates," etc.

The above are basically random thoughts but they do suggest that you do not
want to scrap routine employment documents unless there is a pretty compelling
reason to do so, and I don't think the issue of wanting to avoid an atmosphere
of mistrust is by itself necessarily compelling. Indeed, most employees that I
know routinely accept the idea that basic documentation and "legalese" is in
order and do not interpret this as some sign of mistrust.

I don't think this is an issue of letting lawyers run a company's life. It is
just basic prudence and common sense.

~~~
dctoedt
> the [California] law automatically says that inventions conceived by
> employees in the course of performing their duties belong to the company and
> not to the employee.

It's been awhile since I researched this, but the law used to be that, absent
an invention-assignment agreement, the employee had to be either "hired to
invent" or "set to experimenting" for the employer to be the automatic owner.

I had to litigate the latter point one time for a large telecom company. A
non-technical employee had invented an improvement in some specialized
equipment that the company used, but he hadn't been hired to invent and didn't
have an invention-assignment agreement. The company filed a patent
application. The in-house patent lawyer went to see the employee to get him to
sign a patent assignment - on the sidewalk he ran into the employee, who had
just been laid off. The employee sued the company for misappropriating his
invention. The company won a summary judgment that the employee had been 'set
to experimenting,' but it would have been way simpler and cheaper if the guy
had just signed an invention-assignment agreement.

~~~
grellas
Oops, I had oversimplified things in making my statement as I did (I deal with
these cases where people routinely are "hired to invent" and so took that for
granted in making the statement). Thanks for the clarification.

Of course, this is one more reason (as you point out) why employers should not
treat this issue too loosely.

