Protecting Business Value with Employment Agreements

A business’ value is a function of many hard and soft factors. Of course, revenue and cash flow are vital to determining value, but the likelihood that the cash flow will continue in the future—or rather the risk that it will stop—is another vital component of business value.

Business owners often overlook the role that contracts and agreements play in determining business value. Other agreements such as commercial leases, online user agreements, and customer service agreements, all affect business value. Here, we will look at how well-written and properly-implemented employment agreements can be used to mitigate risks and increase a business’ value. We will see how the opposite is also true and how such agreements (or lack thereof) can have disastrous effects on your business’ value.

Employees: A Valuable Asset

Having an in-place, well-trained, and high-performing team represents a significant portion of a business’ goodwill, and a business’ goodwill represents an equally significant portion of a business’ value. In fact, in some startup company sales—such as when Google pays millions of dollars for a startup technology company with little or no revenue (commonly referred to as an “acqui-hire”)—the team represents all of the value of the company.

However, even outside of the technology space, employees will (or should) be making the sales, providing the services or making the product, paying the bills, collecting the money, and keeping your customers happy. They are a critical part of your business, and they generate your much of your profits and cash flow. As your employees continue to generate value for your company, you want to ensure that that value is protected.

Like any other relationship that your company has, this one must be codified by an agreement that establishes the terms and conditions of the relationship. From the owner’s perspective, employment relationship should be centered around making sure that what your company owns or has paid to develop, remains the property of the company after the employment relationship ends.

Key Employees and Employment Agreements

The primary purpose of the employment agreement is to protect the company’s value by preventing key employees from siphoning off your company’s assets or value to benefit their startups or new employers.

No employment agreement will look exactly like another, but there are some basic protections that almost every company should include in their employment agreements. Your employment agreements should have the following provisions:

Return of Company Property

This type of clause should, in addition to delivery of tangible property at the request of the employer, require the employee to deliver access to accounts used by the employee in his conduct of the employer’s business. Often employees will use their own devices, telephone numbers, e-mail addresses, or social media accounts for work purposes. This clause would give your company the right to all of these.

However, having proper company-assigned accounts for all necessary aspects of an employee’s job is considered best practice. You don’t want to end up in a situation where you can’t access an important account or service—such as web hosting or CRM software—after an employee leaves your company.

Intellectual Property Assignment

Florida’s work-for-hire law provides that what an employee creates during his work hours that is related to his employer’s business is the property of the employer. However, work-for-hire provisions of the law are often not broad enough to account for all of the things that an employee might create that apply to your business.

So, all employment agreements should contain a provision that assigns to the employer all work product created by an employee, whether on or off the job, that is even remotely related to the employer’s business.

That provision should also require the employee to fully disclose and assist the employer with securing intellectual property protection (e.g. signing documents to be filed with governmental agencies).

Confidentiality Definitions and Restrictions

An employee is bound to keep her employer’s secrets confidential by Florida law. However, a better approach is to set out definitions and restrictions in your employment agreement in the event of a dispute. Your agreement should at minimum deal with the following:

• Definitions: Define confidential information as narrowly and specifically as possible,
• Prohibitions: Prohibit the use and disclosure of confidential information,
• Property: Require the return of tangible property that describes confidential information,
• Storage: Require the employee to adhere to the employer’s requirements for storage of confidential information (e.g. online platforms, encryption requirements, and password policies), and
• Notification: Require the employee to notify the employer if the employee is compelled to make a disclosure.

Restrictive Covenants

Agreements with key employees should also contain restrictive covenants that more directly address the protection of your company’s confidential and proprietary information. These covenants include:

• Non-piracy. This clause prohibits your employee from hiring the best of your team for himself or his new employer, thereby protecting your company’s relationship with its vendors.
• Non-solicitation. A non-solicitation clause prohibits your employee from soliciting your company’s customers. With the addition of certain language, it can also forbid him from accepting business from your customers.
• Non-compete. A non-compete clause prohibits your employee from competing with your business, whether for himself or through an employer, for a set time within a geographical area.

Restrictive covenants are often necessary to enforce the confidentiality provision. The employer must show that the employee disclosed or used the information or intended to disclose or use the confidential information, which can be difficult.

Consider an employee that goes to work for a competitor. Unless the competitor begins poaching your customers at suspiciously convenient price points or suddenly produces products using a process based on your trade secret, you might not be able to show a direct use of your company’s confidential information.

With a non-compete, the mere fact that the employee went to work for a competitor is all you need to seek enforcement.

Restrictive covenants are governed by Florida Statute § 542.335. However, there are multiple restrictions and requirements that they must meet in order for the non-compete to be enforceable, so care must be taken up front to draft these provisions of your employment agreement accordingly.

Protect Current and Future Value

Employees themselves are a high-value asset for companies. Much time and resources are spent hiring and training employees to do their jobs. Well-written and properly implemented employment agreements help protect these assets, keep them in place, and increase a business’ eventual sale value.

Your employees also create value for your company through their work, and the agreements you have with your employees should protect that value as well. Provisions in the agreement should ensure that all intellectual property is assigned to the company and that all confidential information is kept secret. Restrictive covenants must also be in place to prohibit unfair use of your company’s confidential information.