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E-Business Directors Service Contracts

David Anderson at Sykes Anderson Perry sets out what to consider

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Taxation and law are complex subjects and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

Directors’ service contracts are seen as fairly standard documents and often little thought goes into them other than remuneration and holidays. In the case of fast growing e-businesses this is a dangerous approach.

Main risks

The risks are not for the director concerned but for the investors and other directors in the company. The main risks are:-

  • The director simply has “had enough” and leaves,
  • The director under performs,
  • The director joins a competitor,
  • The director becomes ill or dies,
  • Key information is shared outside the company,
  • Roles change.
  • The business matures and the start-up directors no longer “fit”

The director simply has “had enough” and leaves

You cannot force someone to work. The contract needs to be drafted with strong financial incentives for the director to stay. This could include bonuses which are only paid after key stages of the project are completed or share options which only vest at certain key times.

The director under performs

In fast growing companies under performers need to leave the company very quickly. The performance criteria need to be spelled out in the service contract. Provisions for him to go without working any notice period need to be included.

The director joins a competitor

Restrictive covenants will need to be included. There may be difficulties enforcing these if the work the director does is very technical and sector specific so his potential employers are very restricted. You cannot completely stop him from working. Think about having a provision for gardening leave. He stays at home and you pay him for 3 months.

The director becomes ill or dies

Think about a key man insurance policy. You want to have the money available so the company can employ someone else quickly to take over. Think also about how you define illness in your contract for instance how do you deal with mental illness whether or not formally diagnosed.

Key information is shared outside the company

In this case the company will need to take immediate action and possibly obtain a court order against both the director or former director. The directors service contract is with the company so if the investors also want the right to take action direct consider whether the directors should also contract with the investors, which could be done within say a shareholders agreement.

Roles change

Traditionally directors’ service contracts specified their role as “Finance Director”, “Marketing Director” or suchlike. This is probably unsuitable for fast growing companies. Roles may change quickly and the contract should deal with this.

The business matures and the start-up directors no longer “fit”

A certain kind of person is the right director at the start-up phase and the initial development of the product. Investors may want a provision in the service contract and probably shareholders agreement for him to stand aside at a later stage in the cycle. This is difficult to achieve but may be essential as the company matures.

November 2017
David Anderson
Solicitor-Advocate and Chartered Tax Adviser
Sykes Anderson Perry Limited