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Exit Clause of Employment Contract

 

Employment in Startups means high risk and high return job. Senior officials of Startup are looking forward for specific exit clauses in employment contracts and startups have to respond positively. The exit clause is being drafted very cautiously and some of the firms and senior officials are seeking the help of law firms for drafting and negotiation of the exit clause.

However this might be new for the Indian Startups but this is a common thing in developed markets. This will be deeply rooted in the startups when the valuation will change. The change in the startups valuation might be positive or negative.

Startups might be having founder members as senior officials like (CEO/CXO/CFO etc.) but by the passage of time startups realize the requirement and appoint professional senior officials  like (CEO/CXO/CFO etc.) for the pivotal role. Jabong, Housing and House joy are among the startups who have hired professional CEOs. The factors/terms between the senior executives and promoters and PE (Private Equity) firms have made the senior executives more cautious for their role in the startup organizations.

 

Veterans Employment Roundtable

The expectations with the senior executives are very very high. In case of Startups it is very important to deliver the results within the framework of time line. The fast growth is very important for the startups and the responsibility lies with the senior executives. Therefore the senior executives expect high compensation for their work. It is worth to mention that the compensation does not mean only the monthly payout rather it includes variable pay scheme, stock options, ESOPs, Sweat Equity which keep the belongingness of the senior executives with the organizations.  The mix of py structure is very important to keep less attrition in the organization at the same time it is important to face the challenging time forte organizations.

The tenures is also a constraint for the senior executives due to the excessive work pressure and pressure of deliverables. The effective working life is also on risk hence he senior executives expect that they get relatively fair share of compensation, share in success and wealth creation to face the untimely exit.

Considering the risk in the startup organizations senior executives are willing to put a exit clause in their employment contract upfront to ensure the monetary and non-monetary value they will get at the time of termination of their work contract by the startup organization. This is just to qunitfy the non-cash benefits which will be converted into cash within how much time ecause the exit may happen anytime in the startup organization because of non-performance upto the expectation or difference amongst the senior executives with promoters and/or PE firms.

The exit might be because of the corporate actions like merger, acquisitions or demerger. The senior executive of the smaller company might have to call it a day in case of change in control and exit from the position. To safeguard his/her interest the senior executive would like to put the exit clause in the employment contract.

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