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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | SEPTEMBER 28, 2000 SMART ANSWERS By Karen E. Klein When an Employment Contract Is a Must In many situations, both the company and the employee benefit from a written pact the clearly sets out responsibilities and rewards
Q: I have a friend who was contracted to set up a business Web site and was later named technical consultant for the firm that hired him. Instead of being paid a fee for his continuing services, he's being offered a monthly stipend and 3% stock options "when the business takes off". Should he get a formal document or contract that embodies the stock options? ----Oladeji Bolaji, Bronx, N.Y. A: We don't normally do career counseling for employees in this space, but there's a lesson for employers here, too. Certainly, getting a formal contract is a priority in your friend's situation, and it's not a bad idea for the business owner as well. Without a document that spells out the details, the offer is ambiguous on several levels: What does 3% stock options really mean? Three percent of the company? Three percent of some fixed number of shares that are being offered to employees? Also, when can he exercise the options? Can he purchase the shares immediately and sell later if and when their value has increased? Is there a buy-back clause? When does it take effect? Who decides when the business "takes off" -- and what happens if it never does? What if he's fired for cause or dies before the company's potential is realized? TIME BOMB. Such ambiguities are the seeds of disputes that can land both sides in court. From an employer's point of view, it's a potential time bomb if a court finds the company liable for a lot more than the boss understood. And such disagreements can only sour the work atmosphere at a small company, where there's no place for a disgruntled person -- owner or employee -- to hide. Harmony with employees is crucial. Mae Lon Ding, president of Personnel Systems Associates, a compensation consulting company based in Anaheim, Calif., can find plenty that's wrong from the employee's point of view, especially if the options turn out to be worthless. "Would he be satisfied if the stipend was all he got for his work? That's probably what will happen," she warns. Nevertheless, Ding says an offer of 3% of the company in stock options is a generous one: "[It's] what I would expect a vice-president for sales or marketing to receive, though there's no telling whether he's being offered 3% of the next Microsoft or 3% of a company that's going to go belly up within a year." Before agreeing to work for this company, your friend should insist on a formal offer with a contract, and he should have it reviewed by an attorney familiar with employee compensation. Presumably, the business owner will do the same.  Have a question about running your business? Ask our small-business experts. Send us anail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.  | | |
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