Due Diligence Handbook

Part III: Employee Matters

Employee costs can easily be one of the largest–if not the largest–expense you have.  Employees can be your greatest asset, but also a big liability, if you don’t manage the relationship and related costs properly.  Accordingly, it gets a nice fat section of the DD Handbook.

Download this article as a PDF.

WHAT THEY ASKED FOR IN PLAIN ENGLISH THIS MEANS….
Employees
Complete list of the Company’s employees including name, position, date of commencement of employment, gross salary, social benefits, other benefits and outstanding options A simple list in Word or Excel should do the trick here.  Most of this information should be in your payroll records and in the monthly information you are providing to your external payroll provider or internal payroll controller.  Ideally, you should be able to take that monthly file, clean it up a bit, add columns where you spell out any unusual items, and send it off.     You can see an example template here.

Regarding options, you will be providing a list of option grants anyway.  Rather than having option data in two places, you can save time by adding some basic employee data such as employee number and position or type to your existing list of employee option grants.  Now, just turn that into a nice pivot table organized by employee number and provide that in addition to the payroll data.

For more on providing information to a payroll provider or controller, see here.

Management employment agreements (or requests for agreements with officers, directors, key employees of the Company and the like).

 

Managers, officers, directors and other key or senior  employees are the employees most likely to have special and employment terms, including extended notice periods or enhanced severance payments on termination. Since this can equal up to a large obligation for the company, anyone considering investing in you will want to review their terms and see what they might be in for. In addition to the original contracts, provide scans of any agreed changes to the terms, such as an increase to the notice period.

Auditors also love to see  these types of contracts, and for the same reason.  Your best bet is to either scan all employee agreements and keep those on hand or, at a minimum, scan employment agreements for management et.al. employees and any updates.  Do this as they happen, and you will not find yourself spending hours scanning stuff at crunch time.

All pension, retirement, health, bonus, employee savings, profit-sharing, deferred compensation, life insurance, severance and termination and similar plans or arrangements currently in effect, if any. If any such plan or arrangement is not set forth in a formal document, provide a reasonably detailed description of the plan or arrangement. A simple chart, in word or excel, should cover this.  See here for an example template.  In addition, where the benefit is backed by a plan documents or agreements with service providers, such as with a Plan Administrator or Trustee for a 401(k) plan, make those available as well.

If you don’t have a copy, the service provider should be able to provide contracts, plan descriptions and plan documents.  However, as a general rule,  I try to make sure I save PDF’s of plan documents and descriptions, contracts and other related documentation.  First, your auditors may want to see them. In addition, every so often you will get a question from an employee about XYZ benefit and it’s just convenient to have the information on hand.

All collective bargaining and union agreements to which the Company is a party or by which it is bound. If your company is subject to union or collective bargaining agreements, provide this.

In Israel, certain “collective bargaining” rights have been extended to cover most or all of the workforce. An example of this would be reimbursement of travel costs.  You should be able to treat this as background labor law—it isn’t something that your company, is specially bound by. The lawyers working from the other side, assuming they have local Israeli counsel, will be familiar with these clauses.

All forms of standard employment agreements for the Company’s employees including form of non-disclosure, non-competition, assignment of intellectual property or other undertaking signed by employees (in the framework of employment agreements or otherwise) This should include everything you sign your employees off on.

  • Blank copies of your current employment contract templates, together with any and all attachments (such as the one required for Clause 14).
  • Any separate agreements for certain items, such as: confidentiality and non-disclosure, assignment of intellectual property, non-compete terms, computer use policy, sexual harassment police, expense policy, bribery policy and so on.

You might also have these items into your employment contract template or included as a set attachment. If so, don’t go breaking them out just for purposes of the Due Diligence.

For more on employment contract templates, see here and here.

For more on Intellectual Property and Assignment of Intellectual Property, see here and here.

For more on Confidential Information and Non-Disclosure Agreements, see here and here.

Loan agreements with officers or directors, whether or not now outstanding, including loans to purchase shares and consulting agreements

 

These can be loans in either direction, where the company owes money to the officer or director or the officer or director owes money to the company.  Where there isn’t a formal agreement (not ideal, but it happens) provide a summary of the key terms and a make sure that you  have relevant documentation (e.g. emails or correspondence, receipts, supporting schedules, copies of payments in either direction, etc. ) on hand if requested.
List of transactions between the Company and an interested party (i.e. any officer, director, or owner of a substantial amount of the company’s securities)

 

The issue with related party transactions is similar to that with transfer pricing (see here).  There is a concern that these transactions might not be on an “arm’s length basis”, that is, that the terms the related party received are better than you would have given some guy off the street.   A simple list detailing  out who the transaction was with, the nature of the transaction and the value is sufficient.  If there are a series of one type of transaction with a party—for example, a director is paid monthly for consulting services—provide the total value per year.

Here as well, have documentation ready to provide if needed.

All employment, consulting, confidentiality, proprietary information, inventions services agreement and related agreements with employees, consultants and other service providers, whether or not currently in effect.

 

Independent Contractors.  List of all independent contractors or consultants used during the previous 3 years.

 

Should you send over every single employment agreement ever signed in the history of the company?  No.  Should you have them available? Yes.

For independent contractors and consultants, if a contract is particularly large, you will probably provide it as part of the “material agreements” section. (We will get to that in a later post, but “material” here means basically “big and/or important”). For your more standard items, have them available.

In both cases, you will want to go through the agreements and make sure you have signed contracts complete with signed assignment agreements and non-disclosure agreements.

The last thing you or a potential acquirer wants is for the company to be slammed with a lawsuit claiming ownership of IP right after you all have closed some nice, fat deal to sell the company for oodles of money. Obviously this is more of a risk with your R&D consultants and employees than with a marketing consultant or your sales team.

For more on Intellectual Property and Assignment of Intellectual Property, see here and here.

For more on Confidential Information and Non-Disclosure Agreements, see here and here.

All internal corporate policy handbooks, procedures, training and personnel manuals or memoranda of the Company. Pretty self-explanatory.  You may have full-fledged personnel manual or you may have a few standalone policies covering key areas such sick and vacation days and expense reimbursements. This will vary based on the size of the company, the number of employees and where you are based; different countries have different expectations.

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