What are the usual terms for severance packages and non-compete clauses for general managers hired to run startup companies?
We are hiring a general manager who has the experience and knowledge that we are lacking to develop the business and make it work. She is asking for a 6 month severance package from day one, then a one year severance package after that. The non-compete she is asking for is a 1 year. We would prefer no severance in the initial 90 day probationary period, then a one month severance for her working 3-6 months, then a 3 month from 6-12 months, then 6 months after year one. We would prefer a 2 year non-compete clause. What do startup companies usually do in this situation?
Severance and non-competition provisions are usually handled on a company-by-company basis in the United States, so it's hard to get a clear read on what's "usual," especially for start-up companies. When it comes to non-compete provisions, courts are loathe to enforce a non-competition clause that is unduly broad (either in terms of time, scope, or geography), because it puts an employee out of work and can render him/her unable to provide for his/her family. Saying that the general manager cannot perform general manager-type services for any company anywhere in the United States for a period of two years will probably be seen as overly restrictive. Depending on the nature of your industry, a 1-year non-compete clause may be more appropriate, but you should consult with a local employment attorney, as courts vary from state to state in terms of what they consider a "reasonable" restriction. Also, you may be able to include a longer time frame as long as you narrow the scope of the kinds of companies to which she can provide the same or similar services.
As to severance pay, again, there is no set standard. However, when you look at trends for executive compensation (thanks to the internet), it seems that your prospective general manager is being overly greedy and you are being overly generous: Two weeks per year of service seems to be the norm. Think about it--if she turned out to be a mediocre hire and you fired her after 12 months, why would you want to be obligated to pay her another 6 (in severance)? You may want to carve out an exception to having to pay severance if the reason for her termination is that the company is going belly-up. Should you agree to providing a severance package, make sure you have a consistent policy with all other hires of the same level. Otherwise, you could find yourself in "discrimination territory." Again, a good employment attorney can help you craft a severance policy that really works for you.
Nina L. Kaufman, Esq. is an award-winning New York City attorney, edutainer and author. Under her Ask The Business Lawyer brand, she reaches thousands of entrepreneurs and small business owners with her legal services, professional speaking, information products, and LexAppeal weekly ezine. She also writes the Making It Legal blog.