In our ‘Dear Sifted’ series we ask you, our readers, to send us your startup problems, before rounding up some top-notch advice from industry experts. Need some sage wisdom yourself? Submit your startup problems here. You can do this anonymously if you prefer.
And if you missed the first few, here’s the experts’ advice on managing a cofounder breakup, finding the right chair for a board and firing a cofounder.
The problem: My CEO wants to fire me
Anonymous COO
I'm the COO of a deeptech startup and have been served a settlement agreement where I lose 62.5% of my equity and get three months of garden leave.
This has come about because the CEO decided to change the scope and title of my role. With reluctance I accepted the change in scope but refused the change in title, which has triggered this.
Should I lose my equity when there has been no bad conduct or performance issues raised? Is there anything I can do to fight this?
The advice
The HR perspective: Natalie Falconer, head of people at early-stage VC firm Forward Partners
Falconer has extensive experience supporting investors and entrepreneurs with managing exits, negotiations and financial settlements, having also held numerous roles at a variety of tech startups and VC firms.
Going through a settlement process is never easy, particularly if you feel the situation is unfair, so I’m sorry you’re in this position. Settlements can be complex and so it's really important that as a first step you know your rights. A settlement is really a negotiation and understanding what you are entitled to and which employment rights are applicable to you is critical to making your case.
When faced with losing your equity if there’s been no bad conduct or performance issues, you should review what was outlined in your share option agreement, like: How many options were you granted? Under what conditions? Do you have a time vesting consideration or performance conditions?
Then you should consider whether you would accept a cash payment for the value of your options at today’s price. Remember that you can also negotiate a higher legal cost contribution in the settlement agreement to allow you to have an expert thoroughly review your options agreement.
You may be financially incentivised to sign an agreeable exit package but, as you are waiving your rights, you must feel that this is on balance with how you are being treated. Be mindful that refusing to sign could result in your being invited back into the business.
Regardless of the decision you make, you need to be clear on your "walk away" point. In other words, what compensation and options figure are you happy with and how far are you willing to take it?
It’s also in your best interest to try and leave the business amicably, to avoid issues like potential reputational damage, loss of relationships and earnings. Settlements can be the best option for an amicable exit, but they often follow intense negotiations.
The lawyer perspective: Jane Amphlett, head of employment at Howard Kennedy LLP
Amphlett is a partner at Howard Kennedy, and frequently advises senior executives involved in contentious issues like this one.
You may well have litigation options for disputing any attempt to dismiss you and deprive you of most of your equity — but before you rush to make things contentious, you need to assess where you stand legally and what kind of a deal you can negotiate.
The key issue for you is likely to be your equity. Whether it's in the form of options or shares, there's likely to be some form of agreement which will set out what you're entitled to retain on termination of your employment (although it's not unknown for startups to document this inadequately or even not at all).
You'll need to assess how the equity on offer compares with what (if anything) you’re contractually entitled to retain (or be paid) after termination in these circumstances. The company may have a wide discretion to forfeit your equity even if you don’t fit the usual template of a "bad leaver".
If you're based in the UK, you may also have grounds to pursue an "unfair prejudice" petition under the Companies Act on the basis that you are being excluded from management of the company — although you can only pursue this if you are a current shareholder. The documentation may also give you rights as a director.
As an employee you’re entitled to be paid for your notice period (usually contractually agreed), whether you spend it on garden leave or get a payment in lieu. If your contract stipulates three months' notice, the settlement agreement isn't offering you much. If you've been employed for two years and are dismissed, you would have a potential claim for unfair dismissal, and you may be able to use that to negotiate a better package.
All of these could give you leverage, but you need to be judicious about what you threaten and how — that's where expert legal advice can reap dividends. You should also think about what commercial leverage you can bring to bear.
Internal politics, reputational issues and client relationships can all make a business keener to agree exit terms — but you need to avoid doing anything which would be a breach of your obligations including your duties as an employee and, if applicable, as a director.
In most cases, an agreed exit is preferable to litigation once you take into account the time, cost and risks that legal proceedings entail.
The VC perspective: Sylvie Nhansana, CFO and partner at early-stage VC Serena
Nhansana has spent the last 10 years working with entrepreneurs to build companies, experiencing and advising founders on how to manage the turbulence along the way from startup to scaleup.
The first thing you need to do is get a full understanding of the situation. In this regard, a meeting with the employer (CEO or HR director) must be called in order to find out the reasoning behind the decision. It’s important to identify the reasons for dismissal to be able to argue against them.
I highly recommend reaching out to lawyers specialising in corporate law and litigations and having them review the settlement agreement, the employment contract and the equity plan.
It’s also worth checking whether the employment contract mentions the job title, and clearly details the scope of the work expected to be carried out. Changing the job position and scope of work usually requires an amendment to the contract.
In terms of equity, you may need to pay attention to the bad leaver clause, and the way the reasons for dismissal are stated. This will help determine whether the said clause applies, which will result in equity loss. Unless there are significant reasons, changing the title of a C-level and penalising them severely is extremely rare.
However, given the turn of events, it looks like it will be hard to continue into the future within this company so it might be wiser to seek a settlement that would allow you to keep your equity.
Keen to get the expert opinion on a disagreement with a cofounder, the best ways to deal with pushy VCs, how to support struggling employees or anything else? Submit your startup problems to us in this survey below — totally anonymously if you prefer — and we’ll get the experts’ perspective on what you should do.
