Retention of Key Employees for IT/SaaS Companies – Executive Employment Agreements

Prevalence of executive employment agreements – the competition for attracting talent in rapidly growing IT/SaaS companies is fierce and retention is a key issue for companies in the industry.  For C-Suite and key executives (I.e. VP/Exec Manager level) the incidence of employment agreement is very high: +/- 90% have employment agreements with protective provisions in favor of the employee: definition of “cause”, often definition of “good reason” (for the employee to terminate due to the company changing the terms of employment, and retain severance), and severance.  The quid-pro is that the company obtains IP assignment, non-compete, non-disclosure and non-solicitation provisions and an employment release upon termination of the executive.

Typical provisions in executive employment agreements – two basic categories are covered in an employment agreement: protective provisions for the company and protective provisions for the executive:

Protective provisions for the company:

Non-compete – the typical duration for C-Suite ranges from a low of 12 months and a high of 24 months. The non-compete is limited to: (i) direct competitors if the SaaS company is in a narrow space, and/or (ii) diverting customers if the SaaS company is in a broad space [and without the restriction on working for competitors].  The typical duration for key executives is 12 months, with certain positions justifying 18 months (I.e. Technology related most often)

Non-solicitation/hire – restriction on hiring or soliciting employees of the company. 12-18 months is the typical duration.

Employment Claims Release – requirement that the employee sign an employment release upon termination in exchange for severance.

Protective provisions for the executive:

Definition of cause – by providing a definition for cause, the circumstances under which an executive can be terminated are limited. Typical definition limits cause to malfeasance, illegal acts, injuring the company, failure to perform duties not cured within 30 days.

Definition of good reason – this is not as prevalent and is typically limited to the C-Suite. Good reason is the circumstances under which the executive can terminate their employment and still receive severance. Typical definition is reduction in role, title, compensation and relocation, without the consent of the C-Suite executive.

Severance – severance is typically paid out over time in accordance with payroll policy:

C-Suite – severance is typically between 6 months and 12 months, with most highly sought executives receiving between 8-12 months.

Executives – severance is typically between 3 months and 6 months.

Severance typically terminates if the employee obtains a new position.

Kurt D. Olender