合理措施播客

Red Flags in Employment Agreements

The hosts used the Sigma Pharm case to underline critical lessons for employees navigating the startup world. The 20-year vesting period for equity, coupled with the company’s right to repurchase shares for a nominal sum, served as glaring red flags. Tim advised listeners to avoid companies offering such terms, explaining that they often reflect a reluctance to genuinely share ownership and value with employees. Chris echoed this sentiment, noting that such extreme clauses deviate sharply from industry norms.
Ultimately, the fired employees not only defended themselves against the misappropriation claims but also counter-sued successfully. They were awarded $26.6 million for breach of contract and fiduciary duty, a rare outcome in trade secret cases. This payout highlighted the significance of understanding employment agreements and being aware of one’s legal rights when disputes arise.

Takeaways for Employees and Startups

Tim and Chris closed the episode by reflecting on the lessons from this case. They advised employees to critically evaluate employment terms and watch for warning signs, such as excessively long vesting periods and unfavorable equity buyback clauses. They also recommended startups maintain transparency and fairness in their agreements to foster trust and long-term success. This case serves as both a cautionary tale for employers and a reminder for employees to advocate for fair treatment in their professional relationships.

收获：

• Trade secret misappropriation cases require evidence to support the claims.
• Extreme terms in employment agreements, such as a 20-year vesting period for equity, can be red flags.
• Employees who are terminated unjustly may have grounds to counter-sue for breach of contract or breach of fiduciary duty.
• It is important to have a solid understanding of the terms and conditions of employment agreements before joining a company.

Transcript:

Tim (00:01.434)
Hey, Chris.

Chris Buntel (00:02.574)
Tim, good morning.

Tim (00:04.538)
I have to rub it in here now that I’ve got my sweet Tangibly gear on, and you don’t.

Chris Buntel (00:13.71)
It’s too hot in Singapore, a diet, a diet for a big heavy base.

Tim (00:13.914)
Yeah, look at that. Isn’t that nice? Well, that and I’m also reminding myself I still need to order yours. That first attempt was a little big. Sorry about that. So I’ve got a few other people who have commented on how nice these vests are. So I probably need to get a little bigger order put in. So anyway, it’s coming. It’s coming. I promise. I’ve got a little time now though.

Chris Buntel (00:23.598)
Mm-hmm.

Chris Buntel (00:39.661)
Awesome.

Tim (00:43.706)
Summer most places, and it’s always summer in Singapore. So I think you’re in good shape. Anyway, episode six, the Reasonable Measures podcast. Here we go. Today’s case is, we referenced it at the end of yesterday’s case or last week’s case, Sigma Pharm, a Pennsylvania maker of generics. And I will say that this case…

Chris Buntel (00:46.764)
Exactly.

Tim (01:13.85)
…is unusual. So as a couple of guys who spend a lot of time reading trade secret case law and talking about cases, you start to see, you know, kind of a fairly repetitive pattern in cases. And this one is definitely an outlier. So I’m excited to talk about it. So Sigma Pharm, maker of generics, started in 2005, and it was started by a guy who was a former professor of pharmacy at Long Island University. Pretty serious academic track record, 130 patents, 200 publications. So, yeah, serious, serious scientist. And he recruited the five that are in this case, five ex-students, to join him in the company, which is not unusual in our world, right? We come out of this academic chemistry world. There’s always professors going off and starting companies and dragging ex-grad students into the mix. All right, so that’s 2005. Fast forward to 2014, nine years later— a lot of time in startup years—and these employees get fired. Sigma Pharm then files a $849 million lawsuit against said ex-employees. Why 849? Why don’t you just round it up to 850 at that point? You know, it’s… I don’t know, maybe 849 sounds more credible. And so what happens next, Chris?

Chris Buntel (03:09.929)
So this case is entertaining on a lot of different levels. Like you said, it’s a whole different story. And ultimately, it was all about money, like most things. So they fire the employees, so they become ex-employees. They get hit with this massive trade secret misappropriation lawsuit. And lo and behold, there’s no evidence. So in the court case, they scoured the laptops of the employees, did the full forensic dig through, and basically couldn’t find any records at all. And it’s interesting because when the professor was recruiting these people, he made very generous promises. So he told them they would get 5% to 10% equity each in the company, which… This company was making millions of dollars in generic and even branded products. So potentially that could be a lot of money. But ultimately, they only got non-voting shares, one to 4% each. And then the real amusing or scary part is it had a 20-year vesting period, which is absolutely insane. Normally, it’s a couple of years, maybe four years.

Tim (04:23.482)
Yeah. Yeah.

Chris Buntel (04:29.543)
For a long vest, but 20 years is just unheard of. Like, that’s ridiculous. And then on top of it, if these employees were terminated, the company could repurchase their shares for one buck, you know, $1. So, yeah, there’s a lot.

Tim (04:44.954)
Yeah. So let me stop you there. And on that last point, I’ve seen a lot of deals over the years, been part of a lot of startups, invested in a lot of startups. Anytime somebody comes to me and says, hey, this is the deal. We get to buy the stock back for a dollar if you’re…

Chris Buntel (05:01.958)
Mm-hmm.

Chris Buntel (05:13.094)
Usually terminated for cause. Yeah, right. Yeah.

Tim (05:15.418)
If terminated for cause, yeah. I just say, like, just run away. You know, like, that’s not the company you want to work for. You know, those are people that are like begrudgingly giving you stock in the company. Like, it never works. It’s always just a mess. And so, yeah, my advice to people that are off, you know, in the startup world for the first time, if you see someone that has those clauses in their, you know, typical employee stock option programs…

Chris Buntel (05:25.254)
All right.

Tim (05:44.698)
I’d say, you know, it’s probably not going to land well and you may want to just kind of keep looking.

Chris Buntel (05:51.172)
Well, and the 20-year vest, for me, is a deal killer. Like, if anyone ever offered me that, I mean, I don’t know if I’d say no or just laugh at them. Like, that’s so far off the curve of industry norms that it’s just laughable. So, of course, the employees were upset, you know, to be terminated because they had invested a lot of time and effort into building this company. So, of course, they counter-sued and ultimately won.

Tim (05:57.69)
It’s insane.

Chris Buntel (06:20.675)
Almost $27 million from the company. And it wasn’t the trade secret. It was actually breach of contract and breach of fiduciary duty in how the CEO treated them. So the employees actually ended up getting a pretty big payout, which, again, is unusual. Like most trade secret cases, if the defendant wins, everyone just walks away. There’s no cash trading hands. This one is, again, a whole different story from what we’re used to seeing.

Tim (06:53.018)
So just to replay that, the company files a misappropriation case against five individuals, right? The courts say, nah, sorry, you’ve got no proof of this. And we’re back into the complaint. They alleged that one of the scientists had improperly arranged a potential deal in India involving some of their materials. One of the scientists was allegedly…

Chris Buntel (06:57.459)
Mm-hmm. Yep. Correct.

Tim (07:21.594)
…working with a competing company to produce vaccines in a different country. And so that was all alleged. And so apparently was not supported at the end of the day. So that all just kind of went away. And so at the same time, then these people that had been fired said, well, wait a second, number one, we didn’t steal your trade secrets. And number two, you know, you probably owe us something based on your bad behavior. Yeah.

Chris Buntel (07:57.955)
26.6, it’s real money.

Tim (08:02.906)
Yeah, across five people. Yeah, amazing. Yeah, you just never see something quite like this. It’s wild.

Chris Buntel (08:08.194)
Now, one of… Yeah, no, it’s bizarre. And one of the challenges of bringing a trade secret lawsuit is you’re usually under a lot of time pressure. So someone takes your information or a partner does something wrong, you actually need to act quickly. And that’s why we always suggest tangibly to have your ducks in a row just in case. Because you need to stop the misappropriation quickly, but you still need evidence. In this case, if you can get past the drama of it, it’s good in a way because it says you can’t just have no evidence at all, or you can’t make up stuff that’s unsupported. You need at least some degree of evidence. And it can be refined during the litigation, which is fine, but you can’t just go in blindly accusing people of doing things without something to back it up. And clearly here there was no evidence, even the vaccine thing. There was something about, I forget if Sigma Pharm or the other company wasn’t even in the vaccine business. So it was nonsense, basically.

Tim (09:25.658)
Yeah, well, it’s again, just a cursory look at case law. It looks like there’s more stuff there. There’s a patent infringement case filed against them and a handful of others. It was a…

Chris Buntel (09:43.04)
Yes, Sigma Pharm’s actually been in a number of lawsuits. So they are no strangers to the court. But this one, again, it’s kind of dramatic and interesting for those of us who read these cases all the time.

Tim (09:46.938)
Yeah.

Tim (09:57.018)
Yeah. I just wonder, like, okay, someone on the inside, either them or their lawyers, needed to have like a fairly, you know, feet on the ground perspective that there’s really nothing here, right? So is this just a, let’s intimidate these people, you know, file this big, you know, throw a big number like 849…

Chris Buntel (10:13.759)
Mm-hmm.

Tim (10:25.914)
…on it and you know, I don’t know what happens. Like, maybe they just run away whimpering and don’t come asking for their equity that we owe them or, you know, like, it just feels like, yeah.

Chris Buntel (10:35.712)
Yeah, it could be. It could be. I mean, most fired employees don’t have the time or resources to fight a huge lawsuit. So they may have thought, well, these people will just fold or walk away. And I’ll send them $1 in the mail and take all their shares. That’s entirely possible. And it would explain a lot, for sure.

Tim (11:03.226)
Yeah, well, I think, yeah, we need to dig a little deeper and see if we can find a, you know, a corollary to this one somewhere. Very, very kind of crazy fact pattern, that’s for sure. Any other sort of, you know, kind of words of wisdom here for, you know, for the employees? I mean, I think when I see, yeah, let’s buy it back for a dollar, it’s kind of a red flag. Yeah, when you see a 20-year vesting on equity, you know, kind of run the other direction. Yeah. I wonder if this is just, you know, this was never really meant to kind of behave like a venture-financed company, right? Which these, those are just not normal in real venture-backed companies. So, you know, maybe it’s a little bit of like one of these things. It’s, yeah, this is kind of a family business, right?

Chris Buntel (11:35.939)
Something’s wrong. Yeah.

Chris Buntel (11:51.358)
Yep. Sure.

Tim (12:01.082)
And you’ll find more of these kind of oddball outlier-type terms in that kind of world. I don’t know any other sort of words of wisdom or thoughts on how these fine scientists from academia could have maybe done something different other than maybe just go to a different company. Maybe not follow their professor. Yeah.

Chris Buntel (12:24.413)
Yeah, yeah, and you know, a lot of family companies are perfectly fine. And a lot of professors, you know, launch startups routinely and do very well. And there’s nothing in here to say, or I don’t believe the employees did their job badly or did anything wrong. You know, there’s the court couldn’t find any evidence of that. So, yeah, I think it’s just they ignored too many red flags at the very beginning and didn’t, you know, seek employment somewhere else. But yeah, they were probably fresh out of school, you know, hadn’t been through as many war stories as we have. So, you know, I can’t blame them that much. Right? Well, and yeah, I mean, it sounds good. And, you know, they knew the professor, they probably trusted him. And, you know, at the end of the day, they end up with almost $27 million. So it’s…

Tim (13:03.034)
Yeah? Yeah.

Tim (13:08.314)
Yeah, you need a job, you know? Sounds fun, you get to work with your friends. Yeah.

Tim (13:22.746)
Yay! Good for them. Good.

Chris Buntel (13:23.356)
It was a painful lesson, but things turned out okay.

Tim (13:27.898)
Yeah, exactly. All right, well, I think with that, we’re gonna call it episode six. Chris, thanks, man.

Chris Buntel (13:35.868)
Yeah, we’ll go back to a normal conventional story tomorrow.

Tim (13:39.126)
Speaking of what is the next one, what are we going to do? What are we talking about?

Chris Buntel (13:42.012)
The next one we’re talking about EV in China. So there’s a massive damages in the EV space in China, which we’ll talk all about. It’s good stuff.

Tim (13:50.202)
Yeah.

Tim (13:54.362)
Yep. Yep. It’s big news. All right, man. Take it easy. We’ll see you later. Bye.

Chris Buntel (13:58.395)
NASA. OK, catch you later. Bye, Tim.