Howard Gerver is a self-proclaimed human capital data geek.  His “day job” specializes in finding innovative and practical ways to save money by identifying “golden nuggets” mined from Big HR Data sets, such as claims and human capital data.  A lot of this work includes analytics, claim auditing and eligibility auditing.  His “nights and weekend” job focuses on helping clients leverage their HR, Benefits, Leave and Time & Attendance data to help improve compliance with the Affordable Care Act (Obamacare).   Throughout his career, he has focused on improving the financial performance of the Payroll, Human Resources and Benefits functions of his clients through advanced technology, process improvement and auditing. In his spare time, he researches new and exciting ways to use Big HR Data to address broader business issues vis-à-vis predictive analytics.

MC: How do you define Big HR Data?

HG: In my humble opinion, Big HR Data applies to the leveraging of “wide and “deep” HR data assets in conjunction with non-HR specific enterprise data as well as external, third party data. Examples of non-HR specific data include: sales, production output, production quality, customer satisfaction surveys and financial results. Examples of third party data include: consumer (e.g. household composition, home ownership, shopping, interests and hobbies), census, health rankings and competitors (i.e., the local labor market).

The key idea is to leverage these collective data sets to:

1) Better understand what has happened (analytics), and

2) Identify what is likely to happen (predictive analytics).

From a business perspective, Big HR Data can be applied to virtually any HR functional area such as talent management, employee engagement, and health benefits.

For example, Big HR Data can address important talent management questions, such as which candidate is likely to succeed? Or, which employees pose a “flight risk?” Regarding employee engagement, Big HR Data can be utilized to identify which employees are more likely to have higher levels of productivity and conversely, which employees are likely to have lower levels of productivity. This information can then be applied to creating budget estimates, for example. Lastly, in the context of health benefits, Big HR Data can be leveraged to identify which employees are likely to have ineligible dependents.  

MC: Which types of “golden nuggets” might an organization uncover by mining Big HR data sets?

HG: “Golden nuggets?!” Can I get some fries with that? In all seriousness, “golden nuggets” can be found in many places. To get the best yield, forensic, or CSI-type tactics need to be employed. Leveraging all data, including written information stored in filing cabinets needs to be included.

Example 1 – High Turnover

Case-in-point, while performing a turnover analysis for a manufacturing client, we initially zeroed in on locations with the highest turnover. Interestingly, it turns out 24/7 plants had the highest turnover. Upon further review, we discovered new hires working the “graveyard shift” had the highest resignation rates. The average “newly resigned” employee lasted only 8 weeks. Naturally, HQ sensed the likely suspects were either environmental, the “job” or local management. This was not the case, it turned out the root cause was never documented in any system.

So, what was the culprit? Drum roll please…During the exit interviews it was learned that these “newly resigned” employees NEVER worked the “graveyard shift” before; these employees had no idea how different the “graveyard shift was from their own day-to-day routine and the impact it would have on their family and social life. While each of these same people as candidates needed a job, they didn’t think through the lifestyle difference between working a traditional 9 to 5 job and a “graveyard shift” job. To remedy the problem, management improved the selection process which included adding a “do you have “graveyard shift”” experience question, as well as the inclusion of probing related questions during the interview process.

Net, net – management recognized the value and importance of a richer HR dataset. Moreover, the new owner (which was a private equity firm) enjoyed the productivity and financial improvements derived from these improvements.

Example 2 – Lowering Healthcare Costs

Another “golden nugget” example pertains to reducing healthcare costs (yes, that’s not a typo – Big HR Data can be used to save money in a transparent, immediate and recurring manner!). For example, a large employer with several thousand employees decided to confirm the eligibility of the dependents enrolled in the medical plan. In spite of the compelling ROI, management sensed the audit would be disruptive and costly. Rather than require 100% of the employees to submit supporting documentation, management sensed there would be a way to leverage its HR and claims data. Essentially, this data would be used to audit only those that made most sense to audit.

To bring the vision to life, we were hired to calculate a risk score for each employee and to stratify the population. Inputs to the risk score included two major categories 1) Demographic outliers and 2) Dependents whose medical/Rx claim costs were higher than the respective per capita costs for their dependent category (spouse, domestic partner, young adult, child). External, third party consumer data was also integrated. Employees representing all geographies, divisions and departments were included. “True” random employees were also added to balance the model. The results were stunning. Approximately 90% of the savings were realized simply by auditing 25% of the population. The “icing on the cake” was an interesting discovery. It turns out about 30 of the spouses had gastric bypasses. Ironically, gastric bypasses were excluded from the plan design. At $30,000 each, this drove the savings even higher!

Net, net – management became a strong proponent for Big HR Data.

Example 3 – Insider Threats

Cybercrime continues to be a material threat for ALL employers. Basically, no firm is safe – even from its own employees! While employers have increasingly strengthened physical controls, fortified processes, updated data security programs, and provided employees with requisite training as an effort to mitigate enterprise risk, cybercrime continues to be an area where employers simply continue to feel exposed.

To that end, the C-suite and the Board are under continuous pressure to make sure tangible and intangible assets are not compromised. Ironically, the same employees who are touted as the “number one asset” are under scrutiny. Here’s where leveraging human capital data assets in conjunction with enterprise as well as external, third party data comes in real handy!

First, please allow me to illustrate a realistic scenario. John, a loyal 12-year veteran of the company did not get the promotion he was counting on. Needless to say he didn’t get the big bonus either. In the short 12 years he worked there, John always got top reviews and got good bonuses. The word on the street was he was a strong contender. While his historical performance was solid, his recent results were off. John attributed his recent performance to stronger competitors and management’s unwillingness to make deals.

Much to everyone’s surprise, John abruptly resigned. To exacerbate the issue, not only did he take valuable clients with him (and millions of dollars in business), but he also took trade secrets and all the pertinent client data files. The sad thing is, part of the problem could have been avoided. Here’s how Big HR Data could have tipped off management that John was at-risk.

Using external legal data, management would have seen that John filed for bankruptcy earlier in the year. He also had a DUI just a few months earlier. A pattern analysis of his network usage also would have shown that he accessed folders that he never previously accessed. Moreover, his visits to social media sites, such as Linkedin and job sites including Indeed would have tipped management off that John was potentially, looking for a job.

Again, the use of data could have lessened the severity of what became a big issue. Imagine a world where Big HR Data in conjunction with legal data, network usage data and website visit data co-existed! While it would not change John’s promotability, management could have leveraged the data to then take appropriate measures.

MC: What types of systems might an organization need to organize and cross check their data to confirm it is accurate?

HG: Hmmmmm, those are two great questions! Let’s first explore the systems an organization needs. The answer varies based upon 1) the business question you’re trying to answer, and 2) the data that’s available. At a minimum, we only require a minimum amount of indicative data, such as employee name, address, birth date, hire date, department and title. We can then append third party data to get a more comprehensive understanding of each employee’s demographics, interests and even legal history (legal history includes arrests, bankruptcies, liens and judgments). Other HR and non-HR data as listed below can also provide value.

  • Applicant (e.g. previous addresses, work history)
  • Skills
  • Training
  • Time & attendance
  • Performance
  • Medical Claims (self-insured plans only)
  • Pharmacy Claims (self-insured plans only)
  • Workers’ Compensation Claims
  • Disability Claims
  • Retirement Elections
  • Stock Purchase Plan Activity
  • Voluntary Insurance Elections
  • 401(K) Loans
  • Production (e.g. sales, units produced, quality metrics)
  • Exit Interviews

While this may appear to be a lot of data, that’s the point! Big HR Data is by default, BIG. It is only when disparate data sets are linked that give real gems the opportunity to “pop.”   Ultimately, management will learn which data types have positive and negative affinities; this will enable management to only work with data that provides value.

The second question pertains to data quality. As everyone knows, it’s critical the foundation of the house is solid before the first and second floors are built. The same applies here. The first thing that comes to mind is the use of internal controls. Since many different datasets are likely to be involved, management should first take an inventory of each dataset. This includes taking a point-in-time record count by business unit and/or geography. This will help establish data compatibility. In the event there’s a data gap, either a replacement data set should be created or the gap needs to be accounted for in the analysis.

For employers that don’t have the requisite controls in place, “approximate math” could be used. For example, an employer embarks on a workforce planning exercise and the goal of the project is to identify future workforce gaps. A critical input is skills inventory data. A quick computation reveals the average employee has 10 different skills.   Management could then determine whether 10 skills “makes sense.” If it does, great! If not, management would need the employees to update their respective skills before the analysis started. Please note, in this scenario it would also be prudent for management to review sample employee skill inventories to make sure they’re current.

MC: How has the use of Big HR Data by organizations changed over the last five years and how do you see it being most useful to an organization going forward?

HG: Big HR Data itself has not really changed at all. What has changed is the mindset of the HR community. Whereas 5 years ago most analyses were limited to data that was sourced from one system due to system constraints as well as limited IT resources, today power HR users can do their own analyses by using intuitive data visualization tools.

Going forward expanded HR data sets will continue to be leveraged by best practice organizations. Given the pervasive use of analytics in every part of the enterprise, it will be “data or die” as the C-suite will no longer accept we don’t have the data or we don’t have the technology to access the data. Net, net – Big HR Data will continue to play a critical role in helping employers maintain a best practice human capital ecosystem.

Editor’s Note:  Proper analysis of Big HR Data can assist organizations in achieving cost-savings across a myriad of programs and departments.  It can also provide great insights into the composition and actions of the workforce itself.  As technology, and its usage, advances, it will be important for employers to monitor and comply with changing laws and regulations as well as ensure that any personally identifiable information is secured and protected.  Employers should also take care that they are not violating applicable laws, such as employment-related or privacy laws, when obtaining data and implementing decisions based on data analytics.

Our colleague Joshua A. Stein, a Member of the Firm at Epstein Becker Green, has a post on the Retail Labor and Employment Law blog that will be of interest to many of our readers in the technology industry: “Nation’s First Website Accessibility ADA Trial Verdict Is In and It’s Not Good for Places of Public Accommodation.”

Following is an excerpt:

After years of ongoing and frequent developments on the website accessibility front, we now finally have – what is generally believed to be – the very first post-trial ADA verdict regarding website accessibility. In deciding Juan Carlos Gil vs. Winn-Dixie Stores, Inc. (Civil Action No. 16-23020-Civ-Scola) – a matter in which Winn-Dixie first made an unsuccessful motion to dismiss the case (prompting the U.S. Department of Justice (“DOJ”) to file a Statement of Interest) – U.S. District Judge Robert N. Scola, Jr. of the Southern District of Florida issued a Verdict and Order ruling in favor of serial Plaintiff, Juan Carlos Gil, holding that Winn-Dixie violated Title III of the ADA (“Title III”) by not providing an accessible public website and, thus, not providing individuals with disabilities with “full and equal enjoyment.”

Judge Scola based his decision on the fact that Winn-Dixie’s website, “is heavily integrated with Winn-Dixie’s physical store locations” that are clearly places of public accommodation covered by Title III and, “operates as a gateway to the physical store locations” (e.g., by providing coupons and a store locator and allowing customers to refill prescriptions). …

Read the full post here.

The Federal Trade Commission (“FTC”) recently issued guidance discussing certain disclosure and authorization requirements that employers must satisfy prior to obtaining background screening reports for prospective employees.  If your company obtains background information to screen prospective employees, now is a good time to make sure you are complying with the Fair Credit Reporting Act (“FCRA”).

Under the FCRA, background screening reports are either “consumer reports” or “investigative consumer reports” when they are used for employment purposes and include information bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living. Notably, the definition of “consumer report” also includes oral or other communications, and is not limited to written communications.

If your business uses background screening reports to assist with hiring decisions, remember, the FCRA requires the following steps:

  1. Prior to obtaining a background screening report about a prospective employee, employers must inform the person that they plan to get the report, and obtain the individual’s written permission allowing the employer to do so.
  2. If the background screening report discloses information that may cause the employer to not hire the prospective employee, the employer must notify the individual of the report’s findings and provide them with a copy of the report. The employer must then give the prospective employee a sufficient amount of time to review the report so they can contest any findings that might be incorrect. Although the law is silent on what constitutes “sufficient time,” the FTC has generally found that five business days satisfies this requirement.
  3. If the employer eventually chooses not to hire the prospective employee based in whole or in part on information provided in the background screening report, the employer must give notice to the prospective employee that says they were not hired due at least in part to the result of the background screening report.

One of the biggest sources of litigation with respect to background check reports recently has been over the disclosure and authorization requirements. The disclosure must be in a clear and conspicuous format that prospective employees will understand. Employers must also get the prospective employee’s written permission prior to getting a background screening report. Per the FCRA, employers may either separate the disclosure and authorization or combine the two into a single document.

The disclosure must be in a stand-alone format, meaning it cannot be in an employment application or a part of a lengthy onboarding packet. Employers can include some minor additional information in the disclosure, such as a brief description of the nature of consumer reports, but only if such information does not confuse or detract prospective employees from the substance of the disclosure.

The FTC guidance provides some examples of the types of provisions that should not be in a disclosure or authorization request:

  • Employers should not include language that purports to release them from liability for conducting, getting, or using a background screening report.
  • Employers should not include a certification by the prospective employee that all information in his or her job application is accurate.
  • Employers should remove any language that purports to require prospective employees to acknowledge that the employer’s hiring decisions are based on legitimate non-discriminatory reasons.
  • Employers should remove overly broad authorizations that allow the release of information that the FCRA does not allow to be included in a background screen report – for example, bankruptcies that are more than 10 years old.

According to the FTC guidance, a disclosure statement (including a combined disclosure and authorization) containing complex legal jargon, additional acknowledgements, or waivers of liability makes it more difficult for prospective employees to understand the main purpose of such documents. Additionally, including other acknowledgements or releases of liability is beyond the scope of what the FCRA permits in the disclosure statement, and the inclusion of such provisions may cause employers to run afoul of the statute. If employers have additional waivers, authorizations, or disclosures that they wish to give to prospective employees, they should present them in a separate document rather than in the FCRA disclosure and authorization.

Failure to comply with the FCRA is not without consequences. Indeed, employers who do not act in accordance with the FCRA are subject to civil penalties under the statute. Willful non-compliance may result in damages up to $1000, court determined punitive damages, and the recovery of costs and reasonable attorney’s fees in successful actions to enforce liability.  The FCRA also contemplates negligent noncompliance.  Employers who are negligently non-compliant with the FCRA can be liable for any actual damages sustained by the consumer, as well as the recovery of costs and reasonable attorney’s fees in successful actions to enforce liability.

Employers who conduct background screenings on potential employees should be mindful of the FTC’s continued enforcement efforts with respect to the FCRA.

Growing a company from the ground-up can be immensely rewarding but also challenging.  With the proliferation of start-up companies in this Digital Age, the question is often asked how a business can grow from a handful of like-minded individuals with a common goal while maintaining its culture and staying in compliance with a myriad of laws that impact its operations and workplace.  On May 17, 2017, Epstein Becker Green’s TMT service team was delighted to co-host with WeWork Dumbo Heights (Prospect): When Jeans Meet Suits: Keeping Your Startup Culture & Staying Compliant with Workplace Laws.  Panelists Jonathan Truppman (Casper), Adam Greenberg (Warby Parker) and AJ Pires (Alloy Development) shared with us their insights as to what builds a best-in-class workplace.  My takeaways from the discussion are as follows:

  • Hire Carefully – It’s important to get to know potential hires, their character and personality, and whether they will share the common goals and mentality of the organization.  Specific skills for the job can be taught.  Try not to hire too quickly, if possible, before you have a sense that the person will fit in with the company culture. Once the organization has its defined culture and values, it will become easier to identify like-minded individuals to hire.
  • It’s OK to Hire the Over Talented – When trying to fill positions, even entry-level, think long-term.  The people that you bring into the organization should be people that you’d like to see grow with the company and move up.  They may be overqualified at first, but give them the skills and training they need to progress even further.  Nurture their ambition and their talents.
  • Create an Open Door – Create an atmosphere where employees feel comfortable speaking with senior management.  Not only will employees appreciate the feedback and guidance, but also, open communication can serve to address any employee concerns early on.  Empower employees to make good decisions with integrity which can help stave off workplace compliance issues.
  • Infuse Social Responsibility – There are many ways to give back to the community and instill philanthropic goals in employees.  Foster a do-good mentality, sponsor programs and allow employees time from work to volunteer.  Not only does this help the community, but it builds strong bonds and a shared vision among employees in the workplace.
  • Engage Advisors When Needed – In the ordinary course, it may become necessary to seek outside advisors, especially as the business grows.  It is helpful to do a gut check periodically to assess whether there are any changes in the law that can impact the business or workplace.
  • Maintain Levity – Try to have fun along the way!

It certainly makes a lot of sense to build a company culture of transparency and inclusion, where talents are recognized and promoted, and giving back is a shared value.  What is good for the human heart is most certainly good for the bottom line.

On April, 24, 2017, the New York State Department of Labor (“NYSDOL”) has filed an appeal to the February 16, 2017 decision by the New York State Industrial Board of Appeals (“Board”). The Board’s ruling held that the NYSDOL’s regulations regarding employer payments via payroll debit cards and direct deposit were invalid, thereby revoking the regulations, which were set to become effective on March 7, 2017. While the regulations remain ineffective, we will continue to provide updates on New York’s payroll debit card and direct deposit rules.

Our colleague Sharon L. Lippett, a Member of the Firm at Epstein Becker Green, has a post on the Financial Services Employment Law blog that will be of interest to many of our readers in the technology industry: “Potential Impact of Trump Tax Reform Plan on Retirement Plans: What’s Old Could Be New Again.”

Following is an excerpt:

While Congress’ attention has most recently been focused on the American Health Care Act, that bill will most likely not be the only proposed legislation that Congress will consider in 2017. It appears that a tax reform plan (the “2017 Tax Proposal”), which could also have a wide-reaching impact, is also on the agenda.

If the 2017 Proposal includes provisions relating to defined contribution retirement plans sponsored by private employers, such as 401(k) plans, the impact will be felt by employers and investment managers, as well as by plan participants. While the Trump Administration has stated that the current version of its 2017 Tax Proposal does not reduce pre-tax contributions to 401(k) plans, speculation continues that a later draft may include curtailment of these contributions or other changes with a similar impact. …

Read the full post here.

On Tuesday, April 18, 2017, the Trump Administration signed an Executive Order (“EO”) titled, Buy American and Hire American.  The EO directs the US Departments of Labor, Justice, State, and Homeland Security to look into ways to reform the current H-1B process used by companies, but in particular, the hi-tech industry, to prevent fraud and abuse. Nothing in this EO’s wording changes or limits the current H-1B visa program.  Any future EO that tries to drastically change the current H-1B program will be met with industry opposition and legal action since much of the current H-1B program is statutory or defined by regulation.  Only Congress can change the laws, and any regulatory changes must first require legal vetting through proper notice and commentary procedures required by the Administrative Procedure Act.

The current H-1B visa program has been in place since 1990. Since that time, some of the program’s weaknesses and vulnerabilities have reared its ugly head.  Unfortunately many of these weaknesses have been exposed and manipulated by the ‘bad apple’ employers who refuse to follow the rules while using the process to hire only the lowest-paid employees.  Other noted weaknesses of the program include the arbitrariness and unfairness of the annual cap lottery; the inability to differentiate between employers that try to hire the best minds compared to those that recruit lower-paid, entry-level professionals; and the use by some employers to outsource their IT work overseas while having their U.S. counterparts train them only to terminate the U.S. workers thereafter.

There also is considerable xenophobia that H-1B visa workers are all taking US jobs or that H-1B workers are being paid lower than their US counterparts. The real facts show there are only 85,000 new cap-based H-1Bs issued every year and that the H-1B regulations require payment of wages commensurate with the local job force.  Unfortunately the use of the H-1B program by a small number of unscrupulous employers continues to generate bad press resulting in the current Administration’s EO focus on the H-1B program.

So what does this EO mean going forward? For the immediate future, nothing more than further scrutiny and press for possible abuses.  The Trump Administration lacks the legal authority to unilaterally change the H-1B program without Congressional legislation or proper promulgation of new regulations under the Administrative Procedure Act.  But it still can implement directives to prevent abuse and fraud, including increased policing through random onsite inspections confirming companies are adhering to the H-1B program; increased filing fees to pay for such onsite inspections; increased investigation of potential high-risk employment violators that do not follow the H-1B regulatory requirements to pay the required wages; and implementing a fairer type of selection system, other than a random lottery, for choosing new H-1B cases for each fiscal year.

In this regard, the added scrutiny of the H-1B program actually may work to the advantage of the ‘good employers’ that follow the rules and try to hire the “best and the brightest.” Much of recent H-1B focus and bad press are attributable to the foreign consulting companies that consume nearly half of the allotted H-1B numbers each year and are part of the U.S. outsourcing controversy.  By decreasing the number of H-1Bs issued to these companies, more H-1Bs will be available for employers that follow the rules and seek to fill truly hard-to-find positions.

Our colleagues Patrick G. Brady and Julie Saker Schlegel, at Epstein Becker Green, have a post on the Retail Labor and Employment Law blog that will be of interest to many of our readers in the technology industry: “Beyond Joint Employment: Do Companies Aid and Abet Discrimination by Conducting Background Checks on Independent Contractors?

Following is an excerpt:

Ever since the National Labor Relations Board (“NLRB”) issued its August 2015 decision in Browning-Ferris Industries of California, Inc., holding two entities may be joint employers if one exercises either direct or indirect control over the terms and conditions of the other’s employees or reserves the right to do so, the concept of joint employment has generated increased interest from plaintiffs’ attorneys, and increased concern from employers. Questions raised by the New York Court of Appeals in a recent oral argument, however, indicate that employers who engage another company’s workers on an independent contractor basis would be wise to guard against another potential form of liability, for aiding and abetting acts that violate various anti-discrimination statutes, including both the New York State (“NYSHRL”) and New York City Human Rights Laws (“NYCHRL”) and the New Jersey Law Against Discrimination (“NJLAD”).

Read the full post here.

Many of the most successful businesses are the product of the investment of its founder’s time, energy and money. Often, this investment may be the most significant source of their retirement income or personal wealth.  Yet at some point, whether due to political or market conditions, or more personal reasons, it may become time to sell the business and unlock the value of this investment.

Here are some important considerations for selling a closely held business, especially for those founders who have never been through a sales process, to achieve a successful exit.

  1. Know the value of your business – and how a buyer might value it. There is not one standard metric used to value a business, and a valuation may take a variety of factors specific to the business or its industry into consideration. Often, buyers will be willing to pay a multiple of earnings or revenue, though the specific multiple will vary based on industry, size, growth potential, as well as other factors. Sellers, who at times tend to overvalue their company, could benefit by engaging a professional valuation firm for an independent perspective. Also, having multiple years of financial statements that have been audited by a reputable CPA firm will enhance the reliability of any buyer price proposal and reduce the likelihood of the buyer lowering its initial offer once it gets “under the hood.”
  2. Anticipate likely transaction structures and acceptable forms of consideration. Buyers typically will propose deals on a “cash-free, debt-free” basis and insist on sellers delivering a pre-determined level of working capital. Buyers may offer all cash or some combination of cash, promissory notes and/or equity in buyer. Equity can be a useful mechanism for aligning the parties’ interests and incentivizing the founder post-closing, typically when the founder is asked to remain with the business. Buyers might propose an “earn-out” arrangement, whereby a portion of the purchase price will get paid only upon the attainment of pre-determined financial or operational milestones. These arrangements are typically more palatable to founders who are staying with the business post-closing and thus have some ability to impact the achievement of those milestones.
  3. Identify factors that can undermine value, and work to clean them up. Especially if valuation is based on an earnings multiple, eliminating or reducing a several hundred thousand dollar expense can result in a multi-million dollar increase in purchase price. Similarly, buyers may seek “dollar for dollar” indemnification (i.e., without any deductibles) for certain matters, such as pending or likely litigation. Sellers often try to resolve these issues before a sale to reduce the likelihood of an indemnity claim post-closing. To the extent such issues cannot be resolved, founders should be forthright about them with the prospective buyer.
  4. Identify third-party approvals – including that of your board. In many deals, a consent or approval from a third party is required before the transaction can close. These can take the form of consents required by contract with a private party, government approvals, or even board approval of the seller. Obtaining these consents or approvals can be time-consuming and expensive, even when founders have enjoyed harmonious relationships with their customers, vendors, lenders, and regulators. Often, consent in a sale transaction requires separate legal review by these parties, which could result in delays. Sometimes other equity holders have a right of first refusal (ROFR) giving them the opportunity for a defined period of time to buy the business on the terms offered by a third party. When a ROFR exists, an eventual sale to a third party could be delayed to allow for the ROFR period to lapse or to obtain a waiver of the ROFR from the holder. Identifying required third party approvals as soon as possible will better enable sellers to realize a timely closing. And, aside from being good corporate practice, to facilitate a smooth and timely board approval process, founders should keep their boards of directors involved and informed as to the sales process at every stage.
  5. Consider your next move (personally); know that restrictions could be imposed. Many founders envision riding off into the proverbial sunset without looking back. Others are already planning their next venture. Others wish to remain in place to see their life’s work flourish post-closing. Of course, buyers may have something else in mind altogether. Buyers may require founders to stay on with the business for a period of months or years and, in any event, will often insist on non-compete and non-solicitation agreements from founders for a number of years post-closing. Founders may also be able to negotiate exceptions to these restrictions that are acceptable to buyers.
  6. Tax matters (very much!). Different transaction structures – for example, asset sales vs. stock (or membership interest) sales, or the inclusion of accounts receivable in the deal – may result in vastly different tax effects to the seller. Founders may avoid “seller’s remorse” by understanding the after-tax value of the deal consideration, especially in light of their anticipated post-closing financial needs. Sellers are well-served to seek the advice of tax and accounting specialists as early as possible to identify a tax-advantageous deal structure.
  7. Take steps to maintain the value of the business. To preserve the value of the business prior to the transaction’s signing and closing, and to facilitate a smooth sales process, sellers may offer retention bonuses to key employees. Variations of these arrangements could entail employees receiving a percentage of the transaction consideration, aligning their interests and those of the founders. Especially where earn-outs are utilized, these arrangements can be tailored to provide for bonuses post-closing, benefiting the business and the founder for years.
  8. Remember to keep your toys! Exit transactions, regardless of structure, do not automatically involve the transfer to the buyer of every last item on the seller’s premises. Often, certain items are actually owned by the founder outright and not the business. Personal effects such as sports memorabilia, artwork, family heirlooms (such as antique furniture located at the business), and similar items should not be overlooked, and the founder will want the definitive agreement to expressly provide that these items will remain with the founder in the sale of the business.

A founder’s decision to sell will surely be momentous both for the business and for the founder. Hopefully that decision can be easier knowing in advance some key considerations for a successful exit transaction.

In the latest HR headline from the start-up world, the offending executive doesn’t fit the typical mold, but the lesson remains the same: don’t ignore human resources.

Miki Agrawal, the self-proclaimed “SHE-eo” of THINX, and her “boundary pushing” workplace demeanor are the focus of a New York City Commission on Human Rights complaint by the former head of public relations, Chelsea Leibow. Leibow alleges that Agrawal created a hostile work environment through her constant discussion of sex, nudity around employees, and inappropriate touching of employees’ breasts.

THINX, the “period underwear” company that seeks to disrupt the menstrual products world, intentionally pushes boundaries with its marketing strategies. In her role, Leibow was responsible for PR emails, which were the subject of media attention highlighting the emails’ casual, “millennial-speak.” According to Leibow in an interview with New York Magazine, the company also pushed internal boundaries of professionalism.  Leibow alleges that, just a few months after she joined THINX Agrawal, “helped herself” to Leibow’s breasts and engaged in a variety of other sexualized conduct.  Leibow asserts that Agrawal drove a casual culture, and that many employees engaged in more casual (and often sexually-inappropriate) conversations out of fear of losing their jobs.

Leibow alleges that she made multiple internal complaints, including to the CFO and CCO, about Agrawal’s behavior, but those complaints were ignored. Rather than establish a formal HR function, Agrawal introduced “Culture Queens” to manage internal disputes. Neither of these individuals had HR experience, and the reporting line brought all complaints back to Agrawal – even those complaints about her. In fact, Leibow alleged that it was ingrained into the culture that the employees and the executive team “operated on different planes.”

In response to Leibow’s complaint and subsequent publicity, Agrawal published a blog acknowledging that THINX failed to appropriately establish a human resources function early enough in the formation of the company. Like many start-ups, when THINX had only 15 employees, Agrawal did not make hiring an HR professional a priority.  She acknowledges that the failure to address human resources was a “problem area,” but “to sit down and get an HR person and think about [health insurance, vacation days, benefits, and maternity leave] were left to the bottom of the pile of things to get done.” THINX has commissioned an employment law firm to investigate these claims, along with several other allegations being anonymously reported to various news outlets.

Following the complaint, Agrawal has stepped down as CEO, and THINX is hiring a new CEO and a HR manager. Our attorneys have seen a continuing pattern of successful start-up companies ignoring human resources functions in favor other responsibilities to launch the business.  But as this example teaches, start-ups and other small businesses should not leave HR-planning to the end. Although managing the HR function early on seems less important than getting the business off the ground, failing to establish basic workplace rules, including a harassment complaint procedure, can lead to major problems.