Do Venture Capitalist Like To Change Pre-existing Employment Contracts?

Q: You’ve spoken at length about vesting for founders and key employees in your term sheet series. I was interested on your take concerning pre-existing employment contracts in which vesting terms and stock ownership has already been agreed upon by the Corporation and Employees including founders?

A: (Jason).  What VCs really want is to make sure that founders and key employees are properly incentivized to make the business a success.  For instance, if the stock awards were already vested, it’s probably that a VC investing in the company would want to reset or impose vesting restrictions on the prior awards.  Perhaps, the VC would want to award additional grants subject to vesting, etc.. to achieve the same result.  It all depends on the cap table dynamics.

Another set of terms that a VC may want to change at the time of investment are overly-generous severance provisions and make clear that all employment is at-will.

Other than that (assuming that cash compensation is not out of line), VC’s normally respect prior agreements.

  • all employment is at-will
    what even the key people? whats to stop them being poached at a critical time by a bigger competitor.

  • It’s also reasonable to expect some terms normalization by VCs to match their preferred structure. In other words, if they plan to structure vesting and employment agmts one way going forward, they’ll want to make sure prior agmts match on material terms.
    Just as VCs want alignment between management and investors, they also want alignment among management.
    I’ve also seen entrepreneurs attempt to “lock-in” employment agmt terms in advance of institutional rounds. If such an agmt is only slightly management friendly it might pass without change, but it’s better to have terms everyone feels comfortable with than pushing the envelope. There is plenty of opportunity to lose a deal between termsheet and closing — don’t inject hurdles with employment agmts that need fixing.