A Director’s Service Agreement (DSA), Founder’s Service Agreement (FSA), and Standard Contract of Employment (SCE) are all employment agreements but differ significantly in scope, purpose, and content due to the distinct roles they govern. Choosing the correct agreement is vital to ensure the terms align with the individual’s role within the company.
Engaging employment lawyers is essential when drafting these agreements to ensure compliance with legal requirements and alignment with the individual’s role. Employment lawyers can provide tailored advice, protect the company’s interests, and address complex issues. Their expertise ensures that agreements are robust, enforceable, and capable of supporting your business’s growth and stability.
In this article we set out the key differences between each contract type.
Director’s Service Agreement (DSA)
A DSA governs the employment terms and statutory responsibilities of directors, integrating their legal duties under the Companies Act 2006 with their role within the company.
Key features include:
- Role and Responsibilities: Defines the director’s duties, including oversight, governance, and strategy execution, while outlining accountability and reporting lines.
- Compliance with the Companies Act 2006: Emphasises statutory duties such as acting in good faith, avoiding conflicts of interest, and promoting the company’s success.
- Governance Obligations: Covers participation in board meetings, corporate governance, reporting to shareholders, and regulatory compliance.
- Confidentiality and Restrictive Covenants: Extensive clauses to protect sensitive company information, with restrictive covenants tailored to the director’s access to strategic data.
- Remuneration Structure: Includes salary, bonuses, share options, and other performance-based incentives tied to the company’s success.
A DSA is essential to define the director’s statutory, strategic, and fiduciary responsibilities, ensuring compliance with the Companies Act 2006 and corporate governance standards.
Founder’s Service Agreement (FSA)
An FSA governs the employment terms of company founders, reflecting their unique role in shaping the company’s vision and operations.
While FSAs may address equity matters, it is essential to involve corporate lawyers to ensure equity-related provisions are properly handled in shareholders’ agreements and articles of association. This is critical, as equity matters often require compliance with the Companies Act 2006, particularly when addressing share conversions, buybacks, clawbacks, or transfer restrictions in the event of a founder ceasing to be a service provider.
Key features include:
- Employment Terms: Defines the founder’s responsibilities, performance expectations, and reporting structure.
- Compensation: Details salary, bonuses, and startup-related benefits. Equity compensation, such as stock options or vesting shares, may be included but must align with other governance documents.
- Equity Provisions: Shareholders’ agreements and articles of association should address critical provisions like founder vesting, buyback rights, and share transfer restrictions to protect the company and investors if a founder departs.
- Intellectual Property (IP): Includes clauses assigning all founder-developed IP to the company.
- Legal Responsibilities: Founders do not automatically assume director duties unless formally appointed to the board. If they are directors, fiduciary responsibilities under the Companies Act 2006 will apply, similar to those in a DSA.
- Termination and Restrictive Covenants: Protects the company from premature exits and includes reasonable and enforceable non-compete and non-solicitation clauses.
Corporate lawyers are crucial in ensuring FSAs are structured correctly. While the FSA may outline some equity terms, the shareholders’ agreement and articles of association should formalise equity matters to comply with statutory requirements and safeguard the company’s long-term interests.
Standard Contract of Employment (SCE)
An SCE is suitable for employees with clearly defined roles and responsibilities, typically unrelated to governance or strategic decision-making.
Key features include:
- Role Definition: Specifies job title, duties, reporting structure, and performance expectations.
- Statutory Compliance: Ensures adherence to the Employment Rights Act 1996, Working Time Regulations, and other employment laws.
- Compensation and Benefits: Covers salary, pensions, health insurance, and bonuses linked to individual or team performance.
- Termination Provisions: Includes notice periods, probationary terms, and standard exit clauses.
- Confidentiality and Restrictive Covenants: Basic clauses to protect trade secrets, client relationships, and other legitimate business interests.
An SCE is essential for employees with clearly defined roles, ensuring compliance with employment laws while providing clear terms to protect both the employer and the employee.
Why Getting the Right Agreement Matters
Choosing the correct agreement ensures clarity, compliance, and alignment with the individual’s role:
- Directors: A DSA protects the company’s governance and strategy while ensuring directors fulfill their statutory duties.
- Founders: An FSA defines the founder’s operational and strategic responsibilities while ensuring equity matters are handled appropriately through governance documents.
- Employees: An SCE provides clear terms for standard employment relationships, ensuring statutory compliance.
How Avery Law Can Help
At Avery Law, we specialise in drafting and structuring DSAs, FSAs, and SCEs tailored to your company’s needs. For founders, we ensure equity-related provisions are addressed in shareholders’ agreements and articles of association, providing the legal protection your business needs as it grows.
Whether you’re hiring your first employee, appointing a director, or formalising founder roles, our experienced team is here to guide you through the process with precision and expertise.
Contact us today