2023 Employment and Equity Contracts: Most Common Unfavorable Clauses

It took us a bit, but we’ve finally compiled the most common unfavorable clauses flagged in contract reviews from 2023. For this review, we’ve specifically focused on our top work-related contracts: Employment Agreements and Equity Agreements. If you’ve done a contract review with us, you know we begin each review with the must-read Notable Clauses section. This week, we highlight the unfavorable clauses flagged most frequently, let’s get started.

Employment Agreements: Types of Contracts

The broad umbrella of Employment Agreements actually cover a couple of different documents: Offer Letters, Employment Agreements (often a formalized offer letter), and Confidential Information and Inventions Assignment Agreements (CIIAA/CIIA/PIIA). It’s possible that these documents further refer to appendixes such as Non-Disclosure Agreement (NDA), Employee Handbook, and other documents you may be bound by.

Employment Agreements: Top Offenders

The most common unfavorable clauses center around what you do outside of work and after you quit the job:

1. Anti-Moonlighting: Restricting your ability to work additional jobs, particularly if they’re related to your role or industry.

2. Non-Competition: Restricting your ability to work on any jobs related to your role or industry, even after you leave this employer.

3. Non-Solicitation: Restricting your ability to separately work with employees, vendors, and/or clients from your employer, even after you leave this employer.

4. Post-Employment Disclosures: Requiring you to disclose details about your subsequent jobs, locations, and projects after you leave.

5. Tolling: Requiring every time-based restriction to pause, effectively extending the total period of that restriction whenever it is breached. For example, if you breach a non-compete for 3 months of the 1 year it is in place, the non-compete period extends by 3 months.

We’ve linked our in-depth blog posts for many of the topics above as every clause may intrude on certain rights you have protected by law, the extent to which differs greatly depending on the state you live in. For example, states like California strongly protect an individual’s right to second jobs, holding non-competes and non-solicits largely unenforceable. For states where laws may not be as clear cut, these clauses are all important starting points for negotiating a more favorable contract.

Equity Agreement: Types of Contracts

Similar to Employment Agreements, Equity Agreements also cover multiple documents: Grant Notice, Equity Incentive Plan, and Exercise Agreement. These three documents work together to grant you equity, define the rules your equity is governed by, and, in the case of options, allow you to convert equity to shares. Depending on the terms of your equity grant, you may have additional documents like an Early Exercise Agreement that govern specific actions.

Equity Agreements: Top Offenders

Two major benefits of equity are your ability to have ownership in the company’s strategy through voting rights and the liquidity it offers when you can convert equity into cash. It’s probably not surprising then that the most common unfavorable clauses work to restrict these benefits:

1. Right of Refusal: This clause is commonly nested within a Right of First Refusal (the ability for your company to have first dibs when you try to sell your equity) and prevents you from selling equity at all without the company’s permission.

2. Proxy and/or Power of Attorney: In cases where your equity typically carries voting and other decision making-rights, you are asked to sign over such rights to the company, typically to the CEO.

3. Equity Clawbacks: Even for the case of your vested shares, the company retains the right to repurchase your shares, sometimes at a price lower than the current FMV.

4. Non-Standard Vesting Schedule: 4 years vesting, 1 year cliff, and monthly/quarterly vesting after is considered industry standard. However, the duration, cliff, and frequency can vary dramatically when companies feel they have the leverage to demand an unfavorable schedule (e.g. Amazon).

Our Knowledge Partner, EquityFTW, has written an excellent guest blog post that covers many of the things you should look out for in your Equity Agreement. Take a look!

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One thing we have to stress is how often specific terms are scattered, and sometimes contradictory, across multiple documents. An Equity Grant Notice may include updated information about vesting and exercise while the Equity Incentive Plan is actually out of date. While the company may note these as legal clerical issues, we see these instances as wiggle room negotiation opportunities for individuals. Instead of shying away, leverage the fine print!

For advocacy and beyond,
The Ask Ginkgo Team