This Week in Startups - Employment Agreement deep dive: IP assignment, offer letters, side hustles & more with Becki DeGraw | Wilson Sonsini Startup Legal Basics

Episode Date: December 10, 2020

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Hey, everybody, welcome back to this week in startups. We're doing our legal basics, startup basics, so that you do not have to email me the same questions over and over again. And I tell you, get a great lawyer because I happen to have one of the world's greatest startup lawyers with me. Becky DeGraw is here from Wilson Sonsini. And we are going through the questions that you and I get asked over and over again, week after week, just so we have a starting point for people, right? Becky, I mean, that's what these videos are intended to be. Just a starting point, that first conversation you would have. Absolutely.

Yeah. And covering the basics is so important to get it right. It's so costly if you don't. Yes. And perhaps I'm trying to think if there's anything you could screw up more than the basics of an employment agreement. Because if this goes wrong, you have somebody on the other side, the employee, who can feel wronged, and they will take action if they feel wronged. And if you get it right, then you can have a reasonable discussion with somebody.

But if you are just going on a handshake agreement or an email agreement, you know, this, an oral agreement, these things are not really legally binding and they're very nebulous, correct? Correct. And people's memory differs quite often without something in writing. as to what the real agreement was. Right. And there's so much nuance. You and I say, we're going to start a company and we'll be partners.

And then one person says, yeah, we'll be partners, but you never talk about how much stock each person gets. Or we're going to be partners, but who's in charge? Or we're going to be partners and we have to vest our interest in the company. We're not just partners in coming up with the idea. We have to actually build it for the next four years. So let's talk about what are the basic documents, because as far as my understanding, of the law works, if it's not in a document that everybody has had proper representation on either side and that's been signed and reviewed and formalized, you're really doing it wrong, correct?

Absolutely. I mean, you can have oral agreements, but again, it comes down to who she said, he said, and what was really agreed to. And a lot of times you don't even think about it. Like you just said, you say, oh, we're going to start a new company. and you don't address all the nuances. And the devil is always in the details. Right.

So the sooner you get to this, the better. What I always tell founders is, hey, if it's worth doing this project and you're about to put thousands of hours, hundreds, if not thousands of hours in the early stage to get this going, it's worth doing right. So let's go through what doing it right means. And I guess what type of letters and agreements, what's the basic framework of an agreement between an employee or co-founders and the company and each other. And why do they exist?

Yeah. So I'd say, you know, you've got a couple different ones. One is going to relate to your service relationship to the company. So if you're an employee, it's going to be an employment agreement. And one is going to relate to the equity that you have in the company. So maybe we can tackle them one at a time. On the employment side, you know, some people will use offer letters. You don't have to use an offer letter.

that's really just the first document that you'll put in place, put in front of a potential candidate. It's going to lay out the basic terms to make sure that you're all on the same page regarding your salary and bonus, your equity award. But at the end of the day, that's really just kind of like a term sheet almost to get you to the next step. So the document that you really want to care about is if you're hiring an employee is an at-will employment agreement. That document is going to have your confidentiality provisions and most importantly, your IP assignment provisions in it. If you don't sign that agreement with your employees on the very first day that they start and they create some IP for you, the default is they own that IP, not the company.

So you want to make sure that those agreements are put in place for every single person, every single employee on day one. When you go through a financing, investors are going to ask you to rep that you have all of those agreements. So make sure that you keep them in, you know, actually a safe place so that you can refer back to them. So if somebody says, well, no, I didn't sign that. You can pull it out and say, well, yes, actually you did. Yes.

And there were a couple of terms in there that we should pause on in case people are very new to this. IP assignment stands for intellectual property assignment. Intellectual property, from my understanding, is a collection of different ideas. There are trademarks. There are patents. there are ideas, there's copy, like you could write something, art, there's code. There's all kinds of different things that come out of a person's mind, go through their

skill set to their fingertips or to a pen, and then become a work product. That's intellectual property. And if you don't assign it to the company, what you're saying is it's by default assigned to the individual. That's right. That's right. And I think you hit on something that's really important, is it's not just, what we call registered IP of patents and trademarks and copyrights, but it's ideas. It's the business

plan itself. It can be, hey, we're just sitting here talking and we're getting excited and we're saying, oh, what about this? What if we do that with the business? What if we go in this direction? All of that is actual IP. And if you don't have that protected, somebody can come back and say, well, wait a minute, I own the IP, not the company. You got to pay me off. Yeah. And, you know, sometimes these are late night sessions or people are going for a walk and talking about ideas. And people forget, like you're saying, whose idea was it to, you know, upload videos to a web page and let people host them for free? Oh, that was my idea. And, you know, there were three co-founders of YouTube. I don't think there was any legal issue between them. But one of them left early. Two of them stayed. One of them got half of his equity from what I remember. And the other two got their full investing of equity. And, you know, then you had Snapchat. They had this third founder that came out of the woodwork. So you see these happen all the time. And if they had IP assignments and employment agreements, this would be avoided these kind of issues, or at least you would have something to hand to your lawyer so they could

respond to a claim. Because anybody can make a claim against you, right, a former employee. But if you have the paperwork, that's the first thing you asked for, right? Absolutely. When a claim comes up, show me the paperwork. Absolutely. I don't want to see the emails. I don't want to hear about what conversation you had on, you know, the eve of Thanksgiving.

I want you to show me what was actually signed between the two parties because that's what's going to carry the most weight. And people will absolutely bring frivolous lawsuits. It's going to happen and it happens all the time. But if, you know, they do bring, you know, some sort of frivolous claim. And it's not an actual lawsuit. It's always some demand letter is how it starts. You know, you pull out that document from your side and say, look, this was signed on the day we started the company before we even started talking about anything. you agreed that you were going to sign everything into the company,

that's highly likely going to make it go away. Yes, and I have been through this many times in my now over 20-year career as I'm getting old. And even when we terminate an employee or they leave on their own, whether it's a voluntary or an involuntary termination, they decide to leave, we decide to leave. We tell them, here is your exit agreement and a reminder. Here is the document you signed for confidentiality. Here is your IP assignment and here are all the different kind of we're breaking up agreements.

And we actually send it to them. That is part of the best practice too, right? Is to remind people and make sure they understand what they're signing. Maybe you could speak to that a little bit. Yeah, absolutely. You know, folks have a lot of questions about that. It's like, oh, when somebody leaves, do I have to get them to sign a separation agreement that has, you know, a release in it? You don't have to get every employee to sign that.

And most companies don't get every employee to sign a separation agreement because in order for that separation agreement to be enforceable, you have to give them some sort of consideration. Maybe you let them vest a little bit more. Maybe you give them some cash payment in order to get that enforceability. But when it comes to founders, when it comes to key employees, you absolutely do want to have that separation agreement in place because it's going to spell out exactly what the terms are. It's going to say, you are vested in X number of shares and only. that many shares. If you want to exercise your option, you have to do it by this date. And it does, it certainly does remind you of all the obligations that you signed up to in that at-will employment agreement. Yeah. And you mentioned at-will now twice. Explain what at-will means in America,

and specifically California, where many of these companies are, because this, I believe, varies by state. And it certainly varies by country we've seen recently in the news. I don't want to date this piece too much, but, you know, Uber had done some layoffs globally, and there was one country, I think it was Amsterdam, where it's like, yeah, you can't let those employees go. You have to ask us to let them go. In France, I think you have to, if it's over X number of people you're laying off, you have to give them a year severance. So it's different in every region.

Let's talk about the region we participate in most California, and then we can work our way out to the United States for at will. Yeah. So at will really just means you can, you work at will. You can leave at any time, and the employer can fire you at any time. there is no advance notice required. The thing I would note that that you touched on is even here in the U.S., state-by-state employment laws vary. And California is one of the most employee-friendly states.

So, for example, if you were to include a non-compete provision in this at-will employment agreement that also has your confidentiality and your IP assignment provisions, California has taken the position that we don't like non-competes in that setting at all. So if you include one, you jeopardize the enforceability of your entire agreement, meaning your confidentiality and IP assignment provisions may be invalidated simply because you included a non-compete provision. Whereas New York, for example, you can include non-compete provisions. It's totally fine as long as they are narrowly terrible. Really important to get the right form for each state.

And that is governed on where the employee. is located, not where the company is located. Right, which is critically, you cut me off at the past, because I was about to ask, in this age of remote work, you have people who were previously in California and decide, hey, I'm going to move up to Woodstock and live this incredible life on a farm. And now, if they do that, the employer could give an employment agreement in New York and say, you work at Uber, you can't work at Lyft, you work at Postmates, you can't work at DoorDash. and they can actually enforce that if it's reasonable, and I believe reasonable is like the person, you can't, my understanding is in some of these reasons you can't, the person can't be kept from making a living, but you can get them for six months or a year to not be able to compete against you. And so you're going to need to have a law firm that has sort of a national footprint if you're a work from home company, correct?

Well, even if you're not a work from home company, you know, even when we were pre-COVID, you know, often, you'll, and you'll hire, you're trying to expand your sales force. So you hire a salesperson out in New York and you may have your rest of your team here. You may hire, you know, a marketing person down in Texas. But if they are located in that state, you have to get an employment agreement tailored to that state. So really, really important. The benefit, a lot of people ask me why is that? Why can't we have non-competeers?

Well, we want to have talent be able to move easily from company to company so that we have a vibrant economy. And I think California made a good decision. I mean, it's amazing to think about that right now. California making a great political decision. But every once in a while I get things correct. And this is a great decision. If you're at Google, why should we stop you from going to the next company? Now, there are trade secrets and IP.

So just because you can go from Waymo, as we saw, a Google spinout that was doing self-driving, and you could go to, say, a company, I don't know, one I was involved in called Uber. you cannot take your hard drive or thumb drive or documents with you. This is called what? Misappropriation of IP. Misappropriation of IP. If you take IP from your current employer, bring it home with you on a thumb drive and you get caught. What happens to that individual?

Well, it depends on how severe it is. I mean, it can be very damaging to. to the individual, not just from a reputation standpoint, but you can get, you can get sued both civilly and criminally on some of these things. So it's serious. And it goes back to that IP assignment, right? Of, you know, if you are working for Google and you've signed your at-will employment agreement that has the IP assignment provision in it, you've agreed that Google owns the IP. Just because you came up with it, you don't get to take it with you when you leave. That, provision stays in place forever. It's not time-bound either. It's not like, oh, well, I've been gone for me for a year, so I must be able to use my IP now. No, no, the company always owns it. And this is why sometimes you'll see people put on their website that they have all these different patents with their names on it. But those patents were obtained while they worked at IBM or Microsoft or Google, and those are Google or IBMs or Microsoft's patents. But you get to have

your name on it. You could say Becky and Jason's, you know, patent for this, you know, incredible, you know, drone or a piece of technology or a business innovation. Why is that, why is the patent office set up like that where individuals get to have their names on it, but it's belongs to the company. Is there some historical thing there or just some credit? I always thought that was interesting. I was curious if you knew. I don't know. I'm not a patent attorney, but I assume you have to have at least an individual who is the creator that's listed, but I don't know the, the history of it. Yeah. And so one thing that comes up over and over again, weekend projects, side hustle. I'm an employee. I work for Google, but I've got a side hustle. I'm thinking about starting my own, you know, little video game that I'm going to upload an app and I'm into chess and I want to make my own little chess game and put it into the Appster.

Who owns that? And how do those side projects work? And what's the best practice on both sides for dealing with? a big trend. People want to do side hustles. So the short answer is it depends who owns it. So if you're, if you're as we all are now working from home and, you know, I've got my work laptop in front of me and I've got my work cell phone next to me and I'm working away at my full-time job and, you know, I'm going to take a little break and but it's between, you know, the hours of eight and five during the day. But I don't, I don't really have anything I have to do for

my full-time job. And I just, you know, switch over on my, for, or on my, you know, employer's laptop. And I start putting together some business plan for my side hustle. Chances are, that is going to be owned by your current employer. So if you want to do a side hustle, do it on your own time, do it on your own equipment, and have it, have nothing to do with. your current employer so they can't touch it at all. They own the devices that they give you. They own everything that's on those devices. Even if you are doing it during your work hours and you have it on your own laptop, it's possible that that could even be brought in. So the best thing, the best advice is just don't have anything touch, anything that your current employer has given you.

Can an employer overreach and say, hey, if you want to do a side hustle on the weekend, you have to clear it with us because I've heard that's the best practice now in some cases, which is if you want to do a side hustle on the weekend, we want you to let us know so we can tell you if it's competitive or not. And I knew somebody in a situation who worked for one of these larger companies. And they wanted to do a crypto project on the weekend. And the company's like, you know, we have this division over here actually working on crypto. And we don't know that your side hustle is not exactly competitive with that.

So you're breaking your non-compete while working for us. So this can get super complicated, can it not? Absolutely. Absolutely. So, you know, I will often get calls from potential clients who are in that situation of I am starting to think about putting together a side hustle. Oh, and it happens to involve two of my other coworkers. There's non-solicitation issues that are involved there as well. And, you know, we absolutely will give advice to them as to how they can separate.

how they can go through the process in the right way. And a lot of that involves what's the first thing that we ask for is, where's your employment agreement with your current employer? I want to see that so that I know what you're bound by so that we know what parameters to work within. And this is very scary for people because it involves attorneys and big companies with unlimited resources. But being straight up with your employer and having good representation on your side is the

best practice, correct? Absolutely. If for nothing else, you don't want to get sued by your current employer when you walk away. That's not, that's not going to be a good start for your new business. Investors are going to run from that if they see that. And it's a small community. I say this all the time. Everybody is so connected. You may think like, oh, my current employer is not going to have anything to do with what I'm doing because it's totally different industry. That may be true. but the person that sets on their board may be part of the same VC firm that happens to, you know, you end up talking with. And next thing you know, it's like, oh, you left on bad terms with that. I don't want to touch it.

So it's a small, small world, like leave on good terms, don't burn bridges. Explain just briefly non-solicitation and how that works in a nuanced way. and what the duration of these non-solicitation agreements are. In other words, I can never ask somebody who I worked with at Google or some other company to come, you know, pick a company and call it Acme Company. If I worked at Acme Company with 10,000 employees, I can never ask any of them to join my company or is it after one year I can ask them or if they apply and I didn't ask them to apply but they did apply because they saw the ad on Craigslist.

Am I in the clear? How does that work? Yeah, this is this is. is actually an area of law that's changing a little bit right now. And this also varies state by state. So we'll take the California approach here. And I'll start with what the law used to be because right now it's kind of in an uncertain area. So the law used to be that basically it was a non-solicit for one year following the termination of your employment, that you couldn't go and solicit others to leave with you or to take them from the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the. former employer. So reasonable. Right. You know, you don't want to take your, the employer doesn't want to lose their whole task force if you come in and steal the best people.

That being said, if any of those people, if you start your own company and any one of those people apply on their own, off their street, unsolicited, that's totally fine. It does come down to a he said, she said thing, right, as to, well, did you really solicit them? did you not. And at the end of the day, if you're a startup, and this is just the reality of the world, if you're a startup and your former employee is a big powerhouse company, they probably have more legal resources than you do. And if you do start picking their key employees and they get upset about that and they serve, you know, a cease and desist letter and a demand letter and wants to, you know, threatens litigation, you really need to take that seriously. You're going to have to disclose that to feature investors.

Investors don't want to, when you're first starting to buy into a lawsuit, right? Particularly when you don't have the resources and all the money is going to come from the money that the investors are putting in. So be careful about it. Again, you know, talk to a lawyer, figure out when and how you can do it. There are some nuanced ways of being able to do it. And sometimes, you know, we'll even see startup companies where it's, you know, two or three folks want to leave together to start a company as co-founders. The best way to do that is to have the conversation with the employer of say, hey, we all have been talking about this together. None of us solicited each other is just something that we have been working on.

And you are in some ways kind of asking for their blessing to move forward. And typically companies will be, you can be surprised, they will actually be supportive. Maybe they want to invest. Maybe they want to have you still on as consultants. Or maybe they want to be a customer of your future project. A lot of this comes down to when these demand letters happen, correct me if I'm wrong, how people feel emotion. So if you were, as an example, at Acme Company and you were to tweet, you know, and you left Acme

to start the Delta Company, if the Delta Company tweets, we have three, open positions, that's one thing. If the Delta company does a mass email to 100 Acme employees and says, we're hiring for three positions, and that winds up in 100 different people's email boxes at the company on their corporate servers, well, that would be quite aggressive and antagonistic and might make the CEO or HR department take notice and then write the demand letter and feel that was overreaching, even if it technically was in solicitation or you'd say, well, I just sent a generic thing. We're looking for somebody, you know, to fill these positions, but I didn't say you. Like, you start getting into these like splitting hair things. I find you, if you step back and you just

think empathetically, how is that going to make the other person feel? And is that going to make them feel we're being jerks or unfair or just unethical? There is a piece of this common senseness and empathy that is important to think about. Yeah. Absolutely. I mean, we're all human beings. We all have emotions, right and a fair number of lawsuits or disputes arise because people's emotions get heated. And if you can avoid that and be reasonable and have reasonable conversations, you're likely going to end up in a better position from, you know, a dispute perspective. I had one instance I'll say and I'll just, I'll scrub some of the details, but I literally had somebody who emailed themselves from their course.

corporate account to their Yahoo account or Outlook account or whatever it was, our entire company database of customers and had written in their corporate laptop in a spreadsheet a plan to create a competing product with a competitor and then taken RIP and cut and pasted it from one document into another. And we found out. The thing that made me feel so hurt about it is the person, you know, said, hey, listen, I'm really broken up, but I want to, you know, I'm resigning. And I said, okay, let's go for a walk. We'll talk about it. I want to be as supportive of us.

I take it for a long walk. We talk for an hour. We get a coffee. And I said, well, you know, I want you to make the right decision. Is there any other company you want to go to because I'm happy to introduce you. If you don't want to be here, you put in a good year for me. I want to be as supportive as I can. So let me know how it can be helpful if you want to work at one of our portfolio

companies. So like, no, no, no, I think I figured it out. And then, of course, I get the call that, hey, this person has stolen everything. And I was like, wow, I feel so betrayed. This person, it was a young person. So they were stupid. And I was like, okay, this is a young, stupid person who has no idea exactly what happened. And I literally dropped, I just a giant, like I dropped 100 bricks on the head of this person and their employer.

And I said, I have this person dead to rights. I am suing everybody for all time. I don't care how petty this is. I don't care how much it costs. I'm taking it to the mat. And the other person was like, I'm a fan. The employer was like,

Jason, I'm a huge fan of yours. I have rescinded the offer to the person who stole all this stuff. I'm aghast. Thank you for telling me. I don't want them stealing for me. I don't want them stealing for you. And I really want to have a good relationship with you.

I was like, you have a great relationship with you right now. And then I told the other person who had worked for me previously, this is a life lesson for you. And, you know, be thankful I don't tweet that you stole for me because it'd be the end of your career. And I was very emotional about it. I'm very emotional about it right now. I hate being stolen from him.

If you steal from somebody, and like you're saying, the reputation damage is so great. And all you have to do, if you were going to steal all this stuff, it's just whatever's in your mind, if you, a month later, decided you wanted to start from scratch on an empty sheet of paper, you can do that. And then I have no recourse. But if you did it on my computer, on my time when I was paying you, oh, that makes me feel terrible. And you stole all those documents. I have a right to be upset, don't I, Becky?

Absolutely. Absolutely. Absolutely. I mean, at the end of the day, it's not just you, but everybody that's invested in that company, right? Everybody, every other employee that's still there that's building that company that has equity in that company. Like, yeah, it's IP theft, idea theft is no different than going out and, you know, theft of somebody's house or car or money or whatever it is. Yeah, and it's arguably worse when it's a company like that because that's what these companies have is. They have ideas and they have strategies and, you know, they're hard to protect. And they're easy to still.

You don't have to break into the house. You email it to yourself as this employee did. And because it's just an email, I think people in their mind, young employees, they just don't think it's stealing. Yeah. They're like, oh, I just emailed it to myself. That's not stealing. One thing that we actually see very often is customer list. And they're like, oh, well, it doesn't matter.

all I'm taking is like names and numbers. Yes, but that is a curated set of names and numbers that you're taking. That is the company's IP as well. You can't take that information and use that in your future endeavor. Right. I mean, it's so dumb because their employees get to keep their LinkedIn and Twitter. Like that's been well established. Your LinkedIn and your Twitter, I don't know if it's been established legally,

but I know it's been established culturally that your LinkedIn is your LinkedIn. Yeah. And that's portable. So if your customers were all following you on LinkedIn and they see your job change because LinkedIn does that and you went from Acme to Delta, okay, fine. If a customer wanted to follow you from Acme to Delta, it's kind of like the no solicitation thing. Well, they decided to reach out and you didn't go down the list of all the existing customers in the list you stole and then rated them, which makes people feel bad.

Yeah, yeah. Don't make people feel bad. That's generally a good life lesson. I tell people don't poke the tiger. Like you just don't want to get into it because, you know, you got in some cases, you know, people have really serious lawyers like I do with Wilson Sincini. And other times they have unlimited resources internally. And like you said, there's a startup. The first thing we ask for when we have diligence is we ask people, are there any legal issues in this company, including a demand letter or a, I just tell people, has a lawyer emailed you about any issue?

Yeah, I mean, really the reps that the company will have to give in a financing will talk about any pending or threatened or any reasonable belief that one of those is coming your way. Reasonable belief. So you even have to have the letter. You can't. Depending. I like that. I may add that to mine. Reasonable belief.

So if somebody calls and says, I'm suing you, you have a reasonable belief. The letter's coming. You should disclose that. Yes. Yes. So depending on the rep, right? But when it comes to diligence, and that's something separate than what's actually documented in your financing documents, in that scenario, I always, always, always tell my company clients over disclose. Because if you don't and something pops up two weeks after the investment closes, material.

You're going to, one, maybe from a legal standpoint, you didn't have to disclose it, let's say. but if it pops up and you have this brand new relationship that's all nice and happy with this investor and they're sitting on your board and you're feeling great and then you have to go back and tell them well actually they were really angry when they left and they threatened a lawsuit and they said all this crazy stuff about you know that they owned IP and all that but you know they just said it I didn't think anything was going to come of it. You're kind of putting yourself in a difficult relationship spot with your new investor. Yeah. It's really transparency. Always a good idea. All right, listen, Becky, this has been amazing advice. Thank you to Wilson Sincini for giving me legal advice for the past decade, keeping me out of trouble and keeping all my ducks in around. And even if you do everything right, bad things can happen and you just have to stay calm and work through it methodically. And that's why it's so important to get the basics correct. Absolutely. The basics correct. Everybody.

All right, Becky, thanks for being on the pod. And we'll see you all next time on this week in startups. Thank you.