Why Do Start-ups Neglect Employment Agreements?

Last Updated at: Oct 30, 2020
annual returns
The Department for Promotion of Industry and Internal Trade (DPIIT), recently unveiled the report States’ Startup Ranking 2019. This is a ranking system under the Union Ministry of Commerce and Industry for the states and union territories (UTs) on their overall performance when it comes to startups. Gujarat was ranked as the best performer.  Karnataka and Kerala were kept in the top performer category.


In today’s era of startups, very few companies consider getting an employee agreement. Understandably, they have more pressing matters on hand, but the advantages the agreement accrues to the company are many. The purpose of this post is to explain what are adverse consequences a firm suffers from the lack of it.

Online businesses spend their initial years finding a reason for their existence. Often, they need to find a market for what they want to do, whether it’s helping people find homes or delivery groceries. At this time, there’s little thought given to any kind of compliance. So it’s no surprise that employment agreements are seen as trivial. But they are among the more important legal requirements. Why? You may just end up paying fines for most non-compliance, but what if your employees leave because, in the absence of an agreement, they realised that their expectations of you were not going to be met?

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Where it Starts
There are too many uncertainties in a start-up to even assess the need for an employment agreement. There are no terms when you don’t know if your operation is going to fold before you even go to market, have features for your product or raise funding to build it in the first place. So you just carry on without it. The first few employees of most start-ups will not have signed anything. In most cases, that’s how it remains until they leave.

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Now, you may argue that founders don’t even have agreements between themselves – the problem Eduardo Saverin faced with Facebook, for example, would have been completely avoided if there were a founders’ agreement in place. But employers should have a greater responsibility toward their employees than themselves, too (although there’s really no reason both can’t happen as you could have them both for under Rs. 10,000).

Worst-case Scenario
Start-ups tend to eschew formalities. They believe their employees are in it for more than just a pay cheque. Many ’employees’ are, in fact, told to first prove their worth and only later discuss pay and equity. Unfair as this is, as a founder, you may think you are at least protected. But what if, as is often the case, one of them turns disgruntled and decides to share your secrets with competition? Do you have a non-disclosure agreement in place to ensure it does not happen? If an early employee upon whom you have entrusted plenty of responsibility wishes to just walk out, how will you handle the consequences? Worse still, what if he also takes what he has worked on? After all, there’s no contract between you and him.

To avoid the above-mentioned problems, a comprehensive employment agreement needs to be prepared. And don’t worry, it won’t be a regular expenditure. You only need to buy or prepare the template once and ensure you have everything covered. The most important clause for early stage start-ups is non-disclosure and -compete agreements. But that’s just from the employer’s perspective. An employee should, however, know his salary (including the break-up), probationary period, job title and description, how the contract can be ended, and the number of holidays he can take per year.

Putting this in place will ensure that your employees have a clear idea of what they can expect from their place of work and reduce the consequence of conflict.

A disgruntled employee can share trade secrets with a competitor if there is no comprehensive employment agreement in place. So, in summary, it is vital that all companies get one prepared, and since the same template can be used always, it is a onetime investment only!