A Must Have Clause for Minority Owner Employees

A Must Have Clause for Minority Owner Employees

Employees can be owners in your business, but you must have a way to get them out if they no longer work for you.  One such clause recently made its way across my desk.

 

A client came to me frustrated that they continued to pay quarterly dividends to very minority owners in their business that used to work for the company but no longer do so.  I was tasked with enticing them to take a payment in exchange for their interest.  The thought by the client was that they might be willing to accept a one-time payment of a modest but not insignificant amount and they would be off the cap table for ever.

 

After a review of the operating agreement, however, the company’s position was much stronger.  Admittedly, I did not draft the operating agreement but whoever did had enough foresight to include a clause to require a prior employee to sell their ownership in the event of their exit from the company, for whatever reason.  The purchase price for their interest was simply the amount of money that they put in originally to purchase the interest.  The thought was that they can be owners of the company, but that in order to be owners, they must remain a part of the workforce. Once they leave the workforce, they must surrender their ownership.

 

Be sure to consider this when dealing with employee ownership relationships.
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