#243 - Building Your Team Legal Considerations with Giannuzzi Lewendon

25:33It differs state to state. The particulars around things like equity might differ depending what type of entity you are, an LLC, a C-corp, an S-corp. Types of vesting terms you use, the types of equity structures you can use for these different types of entities. So someone might give you a template that might seem perfect, perfect for your situation. And then you don't notice that it's been set up for an LLC and you're a C-Corp. Or, hey, this is the greatest NDA IP assignment agreement form. Everybody uses it, but it was drafted for an employee based in Michigan instead of California. We see this type of stuff come up all the time.

26:16So in terms of using templates or getting advice from your friends that have done it before, I think that's great. I love when a client comes to us with a template for the purpose of answering some of the questions that are needed to figure out how to put together the best structure for that situation. That's great. But most of the time when a client comes to us with a random template they pulled from the Internet or that a friend sent them or whatever else, it's just not always the right starting point. And then it frankly often costs more money to fix than to just start with the right starting place.

26:51So to me, if you want to be scrappy, don't hire that first employee until you're working late into the night and early morning on whatever you can do for your business. Or if you can hire one person to do the work of two, do that for a while. Be scrappy in the way you run the business. don't be scrappy by like ignoring legal requirements that's not scrappy that's something else that's a great answer it also made me wonder blake how much are you guys using ai good friend of mine is general counsel for a company and she is using it a ton just for her own research when she needs to look through a bunch of case precedent she just like spin it up so fast but she still needs to be the one who has the judgment to actually comb through the results that's a great question i I mean, we do use it for that exact purpose, for assisting in learning, for vetting the reasoning and the conclusions we're coming to.

27:49We don't use it to replace us. Maybe that day is coming. I'm not so sure it is, but I think some version of it is coming. But what these AI tools can't do is they can't really get you 100 % of the way there. Maybe it can generate a contract for a specific question, but at least for the time being, it doesn't seem to be able to do the real deep thinking and decision making and strategic reasoning that we help you do. So, yeah, we use it. And I think it's been a really useful tool in terms of learning and helping us free up more bandwidth to be helpful to our clients. totally different topic, but I've seen somebody very recently talking about using AI for a trademark application and surprise, surprise, it completely got it wrong.

28:36And now the brand is in hot water. I'm like, oh, geez, like that definitely is not one of those areas where I would skimp on because it's not so expensive to have a lawyer just help you do that trademark properly. And that might be your most important asset. Hopefully it is in the long run. If things go well, it just kind of blew my mind. I'm just, you know, chat GPT is always so positive. You're like, Hey, I was thinking about doing this. It's like, yes, that's a great idea. You're very thoughtful. What a good way to do it. Here's how you do it. And then it's just like, doesn't even give you any protection at all.

29:06Yeah. I, but look, I'm so interested as I know Ryan's been spending a lot of time on it as well. And I love people that want to be at the frontier of how you can use these tools, just do it responsibly. And I think for the most part, even our clients that are really using AI tools a lot, including in terms of contracts and negotiations and things like that, they're still coming to us to do the strategic thinking with them. They're similar to what I said before. We see most of our clients are using it a lot, using it as more learning as opposed to the conclusion. Yeah. Okay. So one of the areas that would make me most nervous if someone said they were using AI is especially around equity for early stage employees.

29:53Because gosh, like you do need to get that right for all the reasons we've been talking about. So what are the things like that you think founders should really understand when they're getting onto this journey of offering equity options, profit, whatever to employees? Yeah, look, equity lasts for a long time, right? You're giving somebody a piece of your business, your baby in many ways. And I think the decisions you make early on around this topic follow you sort of through the rest of the history of your company until there's some exit event or other event where the cap table might change. So I think what I see a lot is, for the most part, founders are thinking about equity, they understand that, look, there's a limited amount of the pie to go around, and they're going to need to live with these decisions for a very long time.

30:48So I see a lot of thinking around percentages. Sometimes I see it as people giving up a large percentage early on without really thinking about it. And sometimes I see people holding on to too much early on, not thinking about the fact that sometimes owning a smaller percentage of a bigger pie is going to be a better result for you. So I see it work both ways. But what I don't see people focusing a lot early on is around what happens if something changes? What happens if somebody leaves the business? Well, should it be different if they leave under a good situation versus a bad situation? What if you just decided that you didn't need somebody anymore versus they stole from you or some other major event like cause event?

31:37So I don't always see people focusing on that part early on, but at the end of the day, that can matter as much if not more than the percentage you're allocating to somebody. Because as your business grows, as time goes on, you want to make sure that the people that own part of your business don't necessarily own it regardless of what happens. You need to pay attention to, okay, what am I trying to do by allocating equity to somebody? Is it to just reward them for something they've already done? Is it to incentivize them to stick around for a long time? So I think in addition to focusing on percentages, it's really important to think about the next step if something changes and how you want to see that long-term plan play out.

32:27I like that. And I think it's really important for so many reasons for everybody to understand what happens if things don't work out or what happens if this happens to the business, just so everybody's aligned. It's so sad to see when it wasn't clear to people and then relationships get ruined and this is a small industry and you hear about it, like they did this to me and I can't believe it. It just, I really like for everyone just to understand what the deal is going in. Ryan, what about people use vesting schedules a lot, right? So like, yeah, there's the equity, but because I want you here for a long time.

33:02So you create vesting schedules. How does that work from a legal perspective and business perspective? Yeah. So I think the overall goal of vesting schedules and CLIFs and everything are, they are, they're ultimately to align the incentives of the service provider with the business while also giving protections to the business to make sure that it gets the outcome at once. It doesn't give too much equity when those outcomes don't happen, right? And so when you are hiring or engaging someone to provide services or outcomes to the business, you can utilize a vesting schedule to help ensure that if they actually succeed and deliver those outcomes, they're gonna be rewarded, right?

33:43And that creates a very strong incentive to perform. If you tie something very specifically to you only vest and get equity, if X happens, they're going to want to do that X. So if you align that X outcome with something that is, this is what we need to grow the business for this specific person, you have a very aligned incentive structure in place. And so I think the proper structure of what you're looking for, it will depend upon the position, right? So there's a couple, the most common buckets that we see are really around either performance based vesting schedule or time based vesting schedule.

34:19And so if you have someone who is in a position where they have metrics that they're really trying to push for, so that the most common thing that we see this in is a sales position. If you put someone to cover sales in a given channel or account, you can tie vesting to hitting those numbers. It can be hitting those numbers at any time or hitting those numbers this year or next year. And so that one, that's going to make that person work that much harder. They don't just get their salary bonus, whatever they're getting. They get equity if they do this too. They're going to go work their butt off for that.

34:53And if they don't hit that, then the company hasn't actually given any equity. That doesn't best. You have not had the dilution that occurs that you are only giving more of the pie if the pie is actually growing because that person is hitting their performance metrics. You know, if it's a more routine role, you know, someone serving as a comptroller or HR or something like that, they don't really have metrics that they're trying to hit quite as much. And so really you want those people to stick around, learn everything about the business, become just integral components of the team. If that's the case, you're probably looking more at time-based vesting to just stick them around or keep them around.

35:32And so the most common structures that we see usually is in the CPG world is four-year vesting with a one-year cliff. And so that ensures that you give them equity. If they leave too early, you know, sometimes you get six months in, nine months in, you realize this person is just not going to be a fit. This is not working out or they decide to leave for whatever reason, then you will not actually vest anything. And that way, when you're 10 years down the road, you don't have all these little people on the, cap table that stuck around for six months and really didn't contribute meaningfully to the overall growth of the trajectory of the business.

36:11So those are what we see in terms of keeping people around. Another big thing that you really have to focus on too is, is there going to be acceleration upon a sale? In the CPG industry, we most commonly see that there will be acceleration. So that means that if you give someone, either someone they haven't been around to hit the full investing, or maybe they got a top-up grant or something like that. If that happens and the company sells, that's a great outcome, right? And so the question is, should they be able to participate with their full grant despite not hitting it, or should they only get whatever portion that they add?

36:46So that's another big thing just to talk about and think about and have everyone driving towards unequivocally, let's get a sale outcome that everyone's really looking for. These are great considerations. It's so hard to think about contemplating all of that Like, okay, I'm hiring this person. But also what happens if it's a sale? Like, well, what does that even look like? I don't know. It's early stages. But that's why people have you guys around to help them out. Because you've seen it before and you know. So one thing I'd like to touch on a little bit more is around co-founder agreements. Because I think that people can often go on into that with a very good heart and spirit of, hey, do you want to do this business with me?

37:27Great, let's do it. It's going to be equal. but it's no thing in history that's just like equal like that. You know, there's always gonna be one person who puts in a little bit more or the other person has a family commitment that then starts taking up more of their time or they get interested in something else. All of these things you couldn't predict that actually will vary their contribution and impact the business. But did you talk about that? What does that mean? Like, what are some areas of concern you see come up with co-founders? Yeah, look, I think it tends to most commonly revolve around ownership and role.

38:00So when you're starting a company with somebody, whether it's a complete stranger or your best friend, my advice is as early as possible, make sure you are aligned on those topics. And by the way, sometimes that's a dynamic conversation where you might be figuring out who's best suited for a certain role. And so this is somewhat an ongoing conversation, but certainly before you start raising money, going too far down the road, bringing other partners or employees or whoever else into the mix, you want to have a clear agreement on those basic principles. And what are those basic principles? Ownership, whether that ownership is subject to vesting, and then just generally what you're supposed to be doing to have that ownership.

38:50And that can take a lot of different forms. Sometimes one co-founder is investing much of the startup capital and the other is investing more time or in contributing the brand name or some other important IP to the business. So it can take a lot of different forms, but I think getting clear on what each person's contribution is, what their ownership is, what their ongoing role will be is really important. it and getting that in some sort of clear written form. And hopefully that's at least some sort of initial agreement, or even if it's just nothing more to start than a very clear email where this is all spelled out, that can save a lot of issues down the line.

39:37I do think it's worth talking about the concept of vesting with co-founders, because I think people hear a lot of different things from different people. And this is actually one of those areas where I see CPG differ a lot from other industries like tech, like in tech, co-founders pretty much always sign up to vesting agreements. If one of them leaves early, they might forfeit some shares. In CPG, we actually see that less, I would say. And I think that flows a little bit from a couple of things, you know, one of which is very often with CPG brands, the founders, the co-founders are very much in front of the brand as a face of the brand, kind of known as synonymous with the brand.

40:22So I think that plays a role. And then also just the fact that a CPG brand takes a lot more money to get going than a tech startup. I mean, a tech startup might have very little, if no real cash upfront needed to get it going and make it a revenue generating business. In CPG, you need to come up with the product, samples, get it made at a commercial scale, bring on people to help with the recipe. There's a lot of upfront costs. And so what we find is co-founders say to themselves, well, look, why should I be subject to vesting? Because we each put$50 ,000 into this business and contributed our blood, sweat and tears and our ideas.

41:04And so I think in this industry, that conversation around co-founder vesting is not as straightforward and is not really as singular as we see it done in other industries. But I do think it's an important conversation to have because we have seen best friends start businesses together, agree that there's not going to be any vesting. And what happens three years in, four years in, one co-founder decides this is his or her life work and goes all in on it. And the other decides this is not as interesting to me, or I'm not fulfilling the role that we thought I was going to fill. And that can be dealt with upfront through vesting agreements.

41:49And other times you have to deal with it in the moment. And that can be a really, really complicated and taxing conversation especially when you're talking about like friends or family members starting businesses together not to talk too much about the social network movie but yeah that just reminds me of like eduardo wrote a check which was a small check but loomed very large at the beginning right because that was all the money that they had but then in the long run is a tiny tiny tiny amount of money but then he went and took a different job. He took his summer internship or whatever. He didn't go out to the house.

42:23And so like a very, very different commitment from people who at the time, I think would have all looked at each other as co-founders, right? So, I mean, just really good to spell that stuff out as detailed as you can, I think really to protect people's relationships as well. Because again, if it's all clear, at least you know what happens if X happens, then Y. So, okay, Unfortunately, maybe my least favorite part about any business, sometimes things don't work out and you have to let people go. What do you feel like is the right or wrong way to do that, Blake? Well, I definitely know the wrong way, which is to do it without thinking.

43:00And I think snap judgments around things like terminating people is always the wrong way to go. Look, sometimes circumstances dictate that you have to take action really quickly. Like we find out somebody is stealing from you. You find out somebody is like engaging in some sort of egregious harassment or putting people's safety at risk. So I want to differentiate between acting impulsively and acting swiftly. Acting swiftly can always be or is often a good thing as long as it's thoughtful. So I think what's important to keep in mind is to think about if you're thinking of terminating somebody, what have you done to that point to establish a basis for letting that person go?

43:49And so, for example, if you're terminating somebody because you think they weren't doing a good job, did you give them an opportunity to improve? Did you give them some sort of warning or other communication and give them an opportunity to do better? If you haven't done that and somebody messes something up or they're doing the wrong thing over and over and you just decide, OK, I'm just going to cut them and no more of this. Well, you haven't really done a great job as a manager in making sure that person had an opportunity to get better. And look, sometimes it's not going to work out. People aren't going to improve.

44:28They're not the right fit for whatever reason. But it's always a good idea to make sure that you've created that sort of performance opportunity for people in order to make sure that, you know, they don't turn around and try to claim that actually you were terminating me for some other unlawful basis. I think it's also important to think about what you're going to say in those meetings with employees when you're having a conversation about a termination of employment. being prepared for that, not just walking in saying, we don't like you, you're not doing a good job and letting somebody go. I think it's really important to remember that every communication you're having around the topic of termination creates some potential for risk.

45:16And I think you want to make sure that you are being very clear about the reasons somebody is being terminated so that there's a record of why the termination occurred. And to the extent there's going to be things like severance payments or whatever else, like I think it's important to make sure that's spelled out very clearly, but maybe that's not always the thing to try to cover in that initial meeting. You can focus the initial meeting on sort of the more personal aspects and leave the discussion of separation terms and light that to a separate communication. We do get the question a lot around, you know, when do I do a separation agreement?

45:59When do I pay severance? When do I not pay severance? For the most part, if you're letting somebody go, even if it's performance-based, it's usually best to think about it the same way you would as a without-cause termination in terms of it's typically always worth it to provide some sort of severance payment, whether it's two weeks or it's a month, depending on how long the person's been around. But if you're giving somebody severance, something they're not necessarily entitled to, you can ask for a release from them. And then when you go to raise your round of financing, when you go to resell your business and an investor or an acquirer is looking back at your history of employees and separations.

46:45If they see that, okay, well, yeah, they paid a little bit of severance to people and they got a release from every employee that left. And that goes a long way in terms of appearing to have clean diligence to an investor or an acquirer. But look, obviously that doesn't help if you have a long history of having lots of employment claims around employee terminations or all of the people at your company have a six-month tenure, that could be evidence of a different type of problem outside of your ability to clean up some of these things from a legal perspective. All right. That is a lot to digest.

47:23Ryan, let me tag you in here. Any thoughts you want to add on to this? Yeah, we've talked a lot today about how creating problems at the beginning could create a compounding issue, right? That you just keep on, you build up this problem and problem and problem. And a separation agreement is a very, very special and powerful opportunity to be able to clean things up mostly with the given employee who's being terminated. So if there's not clear terms about what you had agreed to with equity previously, or if there was never an assignment of inventions agreement or confidentiality agreement expressly agreed to, you can plug those things into a separation agreement.

48:06And then, yeah, it wasn't a great practice that you missed at the beginning, but now you have an enforceable agreement that really plugged the holes of these issues. And so obviously that doesn't fix the problem if you have a pervasive practice of not entering into these agreements. You still have everyone else who hasn't been terminated and signed a separation agreement to deal with, but it can be really helpful for typically if there's a separation, maybe there's just a higher risk with that employee in general for those problems. And so it is a great opportunity. The one caveat for this is this is something that I would say is very important to make sure to have special counsel or special advice on this because there are a lot of legal requirements, things that vary based upon the terms of the situation.

48:53How old is the employee? How many employees are being terminated at one time? All of those things create these extra requirements that it's not just like signing a contract saying, here's your severance and here's a release and that's it. You do have to have proper practices in place and make sure all the terms are correct. And it's just a little bit of a complex area that you'd make sure to get right on the terms. All right. Very helpful, guys. This is really important stuff, I think, for everybody to hear now, whatever stage of the journey they're in. I'm sure no one has done this perfectly.

49:25So This is very good stuff. So Ryan, as we just wrap up here, let's say a founder is hopefully doing great and now they're thinking they could start fundraising. What should they go and try to clean up right now to make that process go a little bit smoother? Yeah. So I think it's in some ways, it's a little bit of a recap of what we discuss in terms of the common mistakes and things to put in place. Right. So to go in, I think, and get to do an audit on your workplace classifications and to have someone take a look, are all of your employees and independent contractors properly classified? it's a lot easier to go and fix those when you're not staring down the barrel of financing or sale or some other acquisition i think getting in place in the ip agreements as well that's very important to make sure sometimes these things just takes time to do it and there's also you give people a lot of leverage to be able to potentially create problems if they know hey the company's about to sell.

50:24And if I create some problems, maybe they're going to be very incentivized to pay me something in order to sign this. If you're just doing this in an ordinary course, then I think you can handle it without that risk of it creating a bigger issue. I think it's really easy to come and do a look at your employee handbook, make sure it's current, make sure it covers all the jurisdictions that you're in. There's sometimes special terms based upon which states your employees are in. I think coming in and doing Blake's point about things going wrong, making sure that all of your performance issues that have been happening are properly documented, create a personnel file for each of your employees.

51:03All of these things are really going to help get yourself properly buttoned up. And it's a lot easier to do that over a course of a couple of months, as opposed to just trying to rush and get ready for a transaction. So, yeah, I think if that's something that is coming down the pipeline in the next 6 to 12 months, these are all things that are very doable. And if you have the feeling that maybe we just haven't been quite as buttoned up as probably could, especially after listening to this podcast, these are things that can really help that situation. All right, Ryan. And as we're closing up here, any final words of advice for founders and also what's the best way for them to stay in touch with you?

51:43Yeah, so stay in touch with us. please reach out. I think you can see our email address and our websites. Always at expo conventions and related items and happy to connect live as well. I think in terms of advice for founders overall, the biggest thing is, like Blake said, there's a difference between being scrappy and being something else. And there's a lot of areas where we should be trying to run things as lean and efficient as possible, but it's not in the areas where you're very prone to just be creating bigger problems. And so I think there's a real benefit to just having a little bit of focus on this, a little bit of an analysis that can pay dividends in the long run.

52:27Yeah. And I think just to add quickly to that, like this is your team. These are the people that are going to be helping you achieve. And I promise you, you will not be able to achieve what you're trying to do in this industry without a team around you. So think about that early. And if you do, and you pay attention to this stuff early on, you're going to build that into the DNA of your company. And that's going to, you know, that's just going to pay dividends over the long term. And so I think it's just one of those areas that it really, really pays to pay attention to early on. All right. Well, thank you to both of you.

53:03This has been a very illuminating episode. And also, Also, I just have to say I love doing episodes with the team from GL because obviously you guys know your stuff. But it also just you guys, it's really clear how much you all love this industry. It seems to me like you're all really happy in your job, doing what you're doing, working with each other, getting to work with all these brands. So the passion is very obvious and your expertise runs really deep. So I always learn stuff on these. So thank you guys very much. Really appreciate that. Absolutely. Absolutely. And I'll see you guys very soon at our many industry trade shows and events.

53:41Looking forward to it. Thanks so much for having us, Daniel. All right. Thanks, everyone. Well, my friends, we've now arrived together at the end of another episode of the Startup CPG podcast, the top globally ranked podcast in CPG. As you may know, we're not just a podcast. We're a community of brands and experts, and you should join. You can sign up at StartupCPG.com. You'll then get an invite to our online Slack community. You're going to hear about amazing events near you, all of our special opportunities to get you in front of buyers, investors, brands, and more. It's a free community. So what are you waiting for?

54:16I will see you there or on our next episode. Bye-bye.

54:37Thank you.