Employment Law Risk and Early-Round Investors

A recent program sponsored by Epstein Becker & Green — Moving to the Next Level: Valuation & Financing Considerations and Employment Strategies for Start-Ups and Emerging Technology Companies — tackled finance and employment law (and their interplay) as they relate to tech start-ups.  The program covered a range of interesting and important issues.

I took away three key questions I would ask early-round investors.

Why back a company that has ignored its employment-related risk?  While the natural instinct of a founder is to move the company aggressively forward (say, in product development, revenue generation, etc.) to attract the right investors at the right time, that rush can be undermined by employment legal issues. There doesn’t need to be a disconnect between founder-passion and company-legal-health: employment counseling is risk management which has to be properly dialed to match the risk tolerances of the start-up.  Some preventative measures are worth doing, others are not and choosing your battles – rather than having them chosen for you by a litigant – is the only rational way to proceed.  This is not speculative (for instance see here, here and here) and as investment money hits a start-up, founders’ pockets will seem that much deeper.

Why back a company where employment-related risk is unknown?  At the same time, the program led me to consider the downside pressure on valuation that pending employment litigation (or just serious exposure) should entail and how to assess that risk.  It’s notable that employment-related considerations in due diligence are often lumped into an overall legal health review or ignored   The only way to properly quantify risk is to get under the hood of a company’s current and past employment practices.

Why back a company which doesn’t understand the workplace implications of its product?  My last point arises from the conversation and an experience a colleague of mine had when she was buying a piece of HR-related software.  During a final review of the product, a product manager from the company simply could not understand why my friend wanted employees, and not their managers, to identify their own gender.  That employer-imposed gender default is a serious stumbling block for a company that wants to treat transgender employees  (and here) lawfully and with respect (and these kinds of examples abound).  The point here is that workplace compliance and legal ramifications of products destined for the workplace cannot be ignored until the last moment – they have to be baked into the product organically, as do considerations of how personal equipment and data interface with a company’s networks. In short, if the product is entering the workplace, then workplace tech law demands employers’ (and their lawyers’) attention.

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