What Are Typical Employment Contract Terms and Severance Benefits for a Startup?

Q:  I have read the your article on typical compensation for senior management of venture backed companies.  There was no mention of severance and length of contract terms. Can you opine?

A: (Jason)  Most everyone in the startup world is an at-will employee and does not have an employment contract.  For those of you unfamiliar, “at-will” means “can be fired at any time for any reason.”  Most employees have offer letters which outline basic terms of their employment, but are silent with regard to severance benefits.  Basic terms include provisions on confidentiality, assignments of inventions and the like. 

I’d estimate that less than 10% of folks working for startups have employment contracts.  The contracts are usually one year in nature.  The ones that I have seen still make it clear that the employee is at-will, but provide some sort of severance benefits, whether this is accelerated vesting or some small cash payout.  Sometimes for high level executives you’ll see 3-6 months of vesting and / or cash comp, but it is not the norm. 

Remember, startups are normally resource constrained – they don’t have extra cash or equity to pass out to people, so don’t expect any types of severance benefits that you would see at a large company. 

  • Jason,
    I’m a little surprised at this post, as most of what you guys write is exactly in line with my experience. However, a number of financings I’ve been involved in with Bay Area VCs have actually had employment contracts with key execs as one of the provisions of the financing. And most companies I’ve worked with as founder/advisor/director have had some type of severance and acceleration provisions for senior management when terminated for non-cause reasons.

  • Great post! In my experience, almost every CEO of a venture backed startup has an employment agreement, particularly founder/CEOs. In addition to the CEO there is usually 1 or 2 more executives that have an agreement, but not always, and as you mention the rest are typically at will. In terms of key terms there are basically two things: (1) compensation and (2) what happens in the event of separation.

  • Jim Kilgour

    Jason, could you please send me the referenced article about start-up compensation?

  • Ping

    I am not sure about Jason’s views on this. To bring any competent executive to the team one should have an employment agreement. Additionally, to protect the firm from any legal/other challenges, it is highly advisable to have the terms of employment in black and white.nn