You Sold Your Startup (and Maybe Your Soul): How to Leave Your Company
A few years ago, a client sold his small startup company to a competitor. In return, the acquiring company gave him some cash, stock options, and an executive-level job. After faithfully serving his new corporate overlord for a number of years, he decided it was time to move on and, possibly, start a new venture. Before tendering his resignation, however, he called me and asked a very sensible question: What does the intrepid, serial entrepreneur need to think about in this situation? Here are a few things.
Dust off your employment agreement (and other agreements from the transaction).
When you sold your company, you likely signed an employment agreement. You may not have paid much attention to it at the time. Once the transaction closes, nobody looks at it again; that is, until you decide to leave.
Before turning in your resignation letter, go back and carefully review the non-compete, non-solicitation, and intellectual property provisions of your employment agreement. It's possible that some of these provisions may have been included in the other transaction documents for the acquisition instead of your employment agreement. It is very important that you understand your post-employment obligations. This was an area that likely received a lot of attention from the lawyers at the time of acquisition. There's a reason for that: if there's going to be a dispute between you and your old employer, it will have something to do with your employment agreement. Although employment agreements will vary from deal to deal, here are some key points to keep in mind:
- Most employment agreements prohibit you from poaching your old coworkers or disrupting the company's relationship with its vendors and customers. By all means, maintain the relationships you developed while at the company but be aware that some non-solicitation provisions can be very broad (including "direct or indirect" disruption of such relationships). Some conversation topics may be off limits for a while.
- Many employment agreements also include an agreement not to compete. Carefully review the scope of that non-compete. Is it very broad ("any business competitive with XYZ company")? Or is it more limited (any business providing software solutions related to [insert industry here])?
- Sometimes the intellectual property provisions of your employment agreement survive termination of your employment for a period of time with respect to intellectual property related to the business of the company. Understand the scope of those provisions and make sure your post-termination activities are outside of the scope.
- Your employment agreement probably requires you to turn in any company property and this includes electronic documents. If you're retaining your laptop and cell phone, or if you tended to work from a home computer, make sure you permanently delete all company documents. While the company should terminate your access to any company accounts or remote-access applications, go ahead and remove bookmarks to those accounts and delete those applications. Do not take any paper records with you.
- As Mom always said, if you don't have anything nice to say, don't say anything at all. That's good advice but in your case it might be a contractual obligation as well. Some employment agreements prohibit you from "disparaging" the company and its products or services. Take the high road and resist the urge to vent.
- If you accept a new job, make sure your new employer is aware of your obligations to your old employer (your agreement may even require you to disclose these obligations to your new employer).
- Finally, as part of the acquisition deal, you may still have "earn-out" dollars and indemnity obligations under the transaction documents. Keep an eye on those post-deal provisions. In particular, make sure the "earn out" isn't tied to a continuing employment obligation.
What about those stock options?
If you're leaving the company within a year or two after acquisition, you're probably leaving some stock options on the table (typical vesting schedules last four years). That's fine, of course, but most stock option plans require you to exercise your options within 30 days after termination of your employment or you forfeit them. What should you do?
- First, do the math. How many options have vested, what's the strike price, and what's the total purchase price for the vested options? Is it a big number? Can you afford it right now? Is it even a good investment? Typically, you don't have to purchase all of the vested options, so consider a smaller investment. Some stock option plans might even allow you to pay the purchase price over time.
- Keep in mind that, in addition to the strike price, you may also have to pay taxes. If your stock option is an "incentive stock option" (sometimes referred to as an "ISO" or "qualified stock option"), this isn't an issue. If your stock option is a non-ISO (or non-qualified option), you will have to pay taxes on the difference between the strike price and the fair market value of the shares at the time of purchase.
- If you do exercise your options, most stock option plans grant the company the right to repurchase those shares at fair market value upon termination of your employment. So, there's the possibility that the company might turn around and repurchase shares you just bought. Because of this, be sure the fair market value is greater than the strike price before you exercise. To determine the current fair market value, ask the company for a copy of its most recent 409A valuation.
If you have restricted stock instead of stock options, you will also want to pay attention to the vesting provisions but there is not an exercise price to deal with.
The good news is that nobody is required to keep working for any company. And with some careful planning and thoughtful action, you can make a clean break and move on to the next opportunity.
You May Also Be Interested In
- Startup Advisory, March 13, 2019
- Startup Advisory, January 10, 2019
- Startup Blog Post, September 6, 2018