United States: Success Is Not Always Founder Friendly (Silicon Valley – Episode 19)

HBO's Silicon Valley is back, but Richard is still out as Pied Piper's CEO.  To recap how we got here:  in the closing moments of last season, the Pied Piper team triumphed by successfully livestreaming its condor cam video to 200,000 viewers—including Laurie, the head of Raviga Capital, one of Pied Piper's two investors.  Laurie was so impressed with the technology that  Raviga Capital immediately bought out Pied Piper's other investor, Russ Hanneman.  By doing so, Raviga Capital gained control of three of Pied Piper's five board seats, and promptly used its majority control to remove Richard as CEO.

My last post discussed the fact that, yes, a company's board usually can remove the company's CEO—even when the CEO is also the founder—and explained some strategies founders in strong negotiating positions sometimes employ to avoid this possibility.  Unfortunately, as "his" lawyer colorfully explains, rather than obtaining these protections, Richard handed his investors a loaded gun.  Still, we were left in suspense all off-season wondering if Richard could find some other way to keep his job as CEO.

In this episode, Richard takes one shot at retaining his title by demanding that "his" lawyer, Ron LaFlamme, help him sue Pied Piper's board.  But this goes nowhere.  First, Ron explains that Richard is in his current predicament because he accepted highly unfavorable terms from former investor, Russ Hanneman.  At the time of that deal, Richard was being sued by Hooli, and was desperate for investment—his choice was to either accept Hanneman's terms or sell Pied Piper to Hooli.  Like many founders, Richard made a reasonable choice to accept less-than-optimal terms in order to preserve the existence of his company, but this meant he couldn't insist on any of the protective measures discussed in my last post, and now doesn't have a legal basis to oppose the board's actions.

On top of that, Ron explains that he is Pied Piper's corporate counsel, not Richard's personal attorney, and he's not about to sue his real client.  In other words, Ron's job is to represent the interests of Pied Piper as a company, and not the interests of its founder or any other individual or investor within Pied Piper.  This message can be an unpleasant surprise for founders, executives and employees who are used to working in close collaboration with their corporation's attorney and think the attorney will be on their side in everything—it certainly surprised Richard.  The negotiation of a founder's employment agreement is a classic situation in which this issue arises.  As part of a financing, an investor may insist that the founder(s) sign an employment agreement formalizing the relationship between the company and the founder.  The founder may assume that the attorney representing the company can also review the employment agreement and advise the founder on its terms.  But the interests of the founder and the company are not aligned.  In fact, their interests could be in direct opposition when it comes to things like severance payments, golden parachutes, vesting arrangements, stock repurchase rights, or continued employment.  In this situation, it often makes sense to have the founder negotiate the terms themselves or retain separate counsel to review the terms of the employment agreement.  Conflicts can arise in more subtle ways as well.  For example, during a second or subsequent round of financing, the interests of the company might not be aligned with the interests of early investors, including founders.  The lesson is that founders and other individuals who work closely with corporate counsel should be aware of situations in which their personal interests might conflict with their company's interests.  They should discuss the situation with corporate counsel if they are worried their personal interests might not be adequately represented.

Meanwhile, over at Hooli...

While Richard was receiving his bad news, Hooli was undergoing its own traumas.  First, Gavin Belson axed the Nucleus team, and then he decided to fire one fifth of Hooli's entire workforce.  (Code/Rag covers these developments in this post.)  These maneuvers raise new potential legal pitfalls for Hooli.  For one thing, layoffs on this scale likely trigger federal and state "WARN Acts," which require Hooli to provide 60-days advance notice before firing the employees.  A failure to provide required WARN notices could be costly for Hooli – requiring Hooli to pay employees their salary and benefits for each day the Act was violated, attorney's fees, and a daily penalty.

In addition, Hooli may be requiring departing employees to agree to "non-disparagement" clauses as part of their severance agreements. For example, Hooli offers Big Head a $20 million severance  payment in exchange for his agreement not to say anything negative about Gavin or Hooli, publicly or privately... for life.  Although non-disparagement clauses are a common feature of severance agreements (and employment agreements), there haven't been very many court cases addressing whether these clauses are valid, or under what circumstances.  In general, the courts have held that there is nothing inherently wrong with such clauses.  However, an employer could get in trouble (and might even be charged with obstruction of justice), if it tried to use a non-disparagement clause to prevent employees from reporting illegal activities to government authorities, or from providing evidence in response to court orders.  In addition, if an employer wants to enforce a non-disparagement clause in court against a current or former employee, the more reasonable the clause is, the more likely a court is to enforce it.  Big Head is receiving a $20 million severance payment, and in that context, a lifetime ban on saying negative things about Hooli and Gavin Belson doesn't seem unreasonable.  But Hooli might pause before it seeks a lifetime non-disparagement agreement from all its departing employees.  A limited-duration ban could appear more reasonable to a court than a lifetime ban, and could be just as effective from Hooli's point of view.  After all, will Hooli—or anyone else for that matter—pay attention or care if an employee grumbles about Hooli three, five or ten years after being laid off?

There's another reason Hooli might want to be careful about how it words its non-disparagement clauses:  federal agencies such as the National Labor Relations Board, the Equal Employment Opportunity Commission, and even the Securities and Exchange Commission, have been seeking to invalidate broadly-worded clauses that might prohibit or discourage workers from communicating — with each other, the public, unions or the government — about the terms and conditions of their employment, or about their employer's potentially illegal activities.  For example, federal law gives "non-supervisory" employees certain rights to discuss and complain about wages, hours, and working conditions with other employees and the public.  The NLRB has invalidated confidentiality and non-disparagement clauses that it views as overly-broad and therefore likely to "chill" employees' exercise of these rights.  As another example, employers cannot impede employees from reporting possible securities law violations to the SEC.  The SEC has started to investigate and take action against employers who might be violating this rule by imposing overly-restrictive confidentiality provisions on employees.

You may recall that last season, Hooli lost its lawsuit against Richard and Pied Piper because it included an invalid non-compete clause in Richard's employment agreement, causing the arbitrator to invalidate the entire employment agreement.  (Code/Rag's post explains the decision.)  It will be interesting to see whether Hooli is making a similar mistake by including overly-broad or overly-aggressive non-disparagement clauses in its current severance agreements.

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