Yiran Hu joined your social networking start-up in 2014, immediately after graduating from Drexel University. She turned down better-paying consulting and investment banking opportunities to get in on the ground floor of a young, fast-growing company. As compensation, Hu receives a nominal salary and stock options. Because the company’s product will require three years to bring to market, the options do not vest for three years. This means that Hu forfeits all of the stock options if she leaves the company before 2017.
In 2016, the company began having serious problems. Even though the project is on schedule and is anticipated to be a huge success, costs are skyrocketing, and your investors demand a significant reduction in operating expenses.
You are considering firing Hu. Although she has performed well, Hu was the person most recently hired and is an at-will employee. You fear a lawsuit, especially given the company’s close-knit character. At this critical stage, the legal fees alone from a wrongful termination lawsuit could bankrupt the company.
You are also uneasy, because Hu has not signed a noncompetition or nondisclosure agreement. In the early days of your company, you were hiring employees without consideration of the competition and disclosure issues. You decide to immediately ask Hu to sign noncompetition and nondisclosure agreements. Under the noncompetition agreement, Hu will be prohibited from working for any social networking firm for two years after her employment with your company ends.
Should you have Hu sign the noncompetition and nondisclosure agreements? Will these agreements be enforceable? Should you fire Hu to reduce operating expenses? If Hu is terminated, on what basis could she sue the company? Would she prevail? How could you have structured the relationship to avoid this potential lawsuit
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