Tips for Exiting Employees of Early-Stage Companies

You may (and likely will) encounter various reasons for wanting to separate with certain employees.  These can be based on company operational needs (such as cost-cutting measures, shifts in company focus, demands of investors, and the elimination of certain roles), or concerns about particular employees (such as poor performance, lack of skill set, and lack of ability to grow with the anticipated next stage of the company).

Regardless of the reason for termination, it is important to carefully assess risk and review key considerations, both when deciding to terminate employment and when implementing the decision.  This tip sheet explains some, but not all, of those key considerations.  Also check out our Checklist for Departing Employees.

For a smooth and lawful transition, it also is essential to strategically script discussions and consider logistics before taking any termination action.

How to Assess Your Legal Risk

When assessing the potential risk and legal obligations in a particular termination, you should consider a multitude of factors, including:

• Reason for the termination decision, as well as the support, documentation and prior communication of that reason;
• Any applicable protected classifications for purposes of potential discrimination, harassment, or retaliation claims – these include not only attributes such as age, race, gender, disability, religion, and sexual orientation, but many other categories as well, such as whistleblower protections and protections for exercising legal rights;
• Immigration status;
• Upcoming vesting of any bonus, equity, or other compensation or benefits;
• Any contractual commitments (written or oral), plans or policies that govern the individual’s employment or potential post-employment benefits; and
• Past, present and expected future terminations, including previous treatment of employees in similar situations, if any, and the potential for setting an expectation, or “precedent,” for treatment of employees in the future.

Severance or No Severance?

In addition, you should consider whether to offer the employee a severance package (or if some severance benefits are already owed under prior agreements, whether you will increase or modify those benefits).  If the company wants the exiting employee to sign a release of claims, it must offer something extra — above and beyond legal and contractual requirements – in order to obtain an effective release.

There are many options for putting together a severance package, ranging from transition periods of continued service, compensation, benefit and equity packages, to provisions for messaging and timing of the employee’s exit.  Which benefits a company should offer depends on the particular circumstances of each termination.

Consider Business Logistics

Finally, it is important to consider logistical factors, some of which may impact legal concerns, including:

• Strategies for the timing, location, and participants in the exit discussion;
• Talking points for the exit discussion with the employee;
• Logistics and timing of final pay and exit paperwork (in amounts and within the timeframe required by state and federal law);
• Whether the company should obtain passwords or other information prior to the employee’s exit, especially if the employee is the signatory, designated contact, or account owner for any company accounts;
• Any other relationships or agreements (e.g., promissory notes, elected positions, transfer of benefit plans, visa status and requirements upon termination, etc.) that should be addressed;
• Protection of company IP, including the ability for this individual to harm IP on his or her way out;
• Logistics of the employee’s return of company property, and exit from the office; and
• Talking points for discussions with remaining employees, taking into account workplace morale and agreed-upon messaging.

For any early-stage company employment termination, it is wise to speak with employment counsel when making and implementing the termination decision.  Bear in mind that consideration of the above factors, and the gathering of any applicable agreements, plans or policies prior to the conversation with counsel, will help make the call as efficient as possible.