<PAGE>
 
                                                                   EXHIBIT 10.14
                             EMPLOYMENT AGREEMENT
                             --------------------


          EMPLOYMENT AGREEMENT, dated as of September 30, 1998, between Toy Biz,
Inc., a Delaware corporation (the "Company") and Avi Arad (the "Executive").

          WHEREAS, the Company wishes to employ the Executive, and the Executive
wishes to accept such employment, on the terms and conditions set forth in this
Agreement; and

          WHEREAS, the Company intends to acquire Marvel Entertainment Group,
Inc. (the "Acquisition").

          NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein and the mutual benefits to be derived herefrom, the parties hereto
agree as follows:

     1.   Employment, Duties and Acceptance.
          --------------------------------- 

          1.1  Employment, Duties.  The Company hereby employs the Executive for
               ------------------                                               
the Term (as defined in Section 2.1), to render exclusive and full-time services
to the Company as (i) the sole senior creative officer of the Company, which is
the most senior creative office within the Company with respect to all media
activities, and to whom the entire creative operations of the Company will
report, either directly or indirectly, as to media activities, and (ii)
following consummation of the Acquisition, also as the President and Chief
Executive Officer of the Company's Marvel Media division (through which the
Company will conduct all of its multimedia activities), or in such other
executive position as may be mutually agreed upon by the Company and the
Executive.  The Executive shall report solely to the Company's Chief Executive
Officer and Board of Directors and shall perform such other duties consistent
with such positions as may be assigned to the Executive by the Company's Chief
Executive Officer or Board of Directors. Notwithstanding the foregoing, the
Executive may devote up to 120 hours in any twelve month period to business
activities, other than those of the Company, in connection with services he may
perform pursuant to the pre-existing commitments identified on Schedule I (the
"Prior Commitments") or in connection with the activities of Avi Arad &
Associates ("Associates").

          1.2  Acceptance.  The Executive hereby accepts such employment and
               ----------                                                   
agrees to render the services described above. During the Term, the Executive
agrees to serve the Company faithfully and to the best of the Executive's
ability, to devote the Executive's entire business time, energy and skill to
such employment (subject to the final sentence of Section 1.1), and to 
<PAGE>
 
use the Executive's best efforts, skill and ability to promote the Company's
interests. The Executive further agrees to accept election, and to serve during
all or any part of the Term, as an officer or director of the Company and of any
subsidiary or affiliate of the Company, without any compensation therefor other
than that specified in this Agreement, if elected to any such position by the
shareholders or by the Board of Directors of the Company or of any subsidiary or
affiliate, as the case may be; provided, however, that any such position shall
                               --------  -------              
not diminish the scope of duties required to be performed by Executive, or
Executive's position or authority, pursuant to Section 1.1 hereof.

          1.3  Location.  The duties to be performed by the Executive hereunder
               --------                                                        
shall be performed primarily at the principal executive office of the Company in
New York City, subject to reasonable and customary travel requirements on behalf
of the Company.  The Company shall provide the Executive with office space,
selected by Executive and subject to approval by the Company's Board of
Directors, in California in connection with his activities on behalf of the
Marvel Media division.  The Company shall also grant the Executive the power to
hire and dismiss appropriate staff, including, but not limited to,
administrative and secretarial assistance and other support service personnel
with respect to such office space, in accordance with the Company's approved
business plan.

     2.   Term of Employment
          ------------------

          2.1  The Term.  The term of the Executive's employment under this
               --------                                                    
Agreement (the "Term") shall commence on September 30, 1998 and shall end on
December 31, 2000 or such later date to which the Term is extended pursuant to
Section 2.2 hereof.

          2.2  Special Curtailment.  The Term shall end earlier than the
               -------------------                                      
original December 31, 2000 termination date provided in Section 2.1 hereof, if
sooner terminated pursuant to Section 4 hereof. Non-extension of the Term shall
not be deemed to be a wrongful termination of the Term or this Agreement by the
Company pursuant to Section 4 hereof.

     3.   Compensation; Benefits.
          ---------------------- 

          3.1  Salary.  As compensation for all services to be rendered pursuant
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to this Agreement, the Company agrees to pay the Executive during the Term a
base salary, payable bi-weekly in arrears, at the annual rate of not less than
$375,000.00, less such deductions or amounts to be withheld as required by
applicable law and regulations (the "Base Salary"). The Company shall, on an
annual basis at the end of each calendar year, review the Executive's Base
Salary and determine, in its discretion, whether to increase the Base Salary,
and if so 

                                      -2-
<PAGE>
 
determined, such increased amount shall, from and after the effective date of
the increase, constitute "Base Salary" for purposes of this Agreement.

          3.2  Bonus.  In addition to the amounts to be paid to the Executive
               -----                                                         
pursuant to Section 3.1 hereof, the Executive will be eligible, upon the
decision of the Board of Directors and in the Board's sole discretion, to
receive a discretionary bonus with respect to each year of the Term in such
amount as the Board in its sole discretion may determine.

          3.3  Business Expenses.  The Company shall pay for or reimburse the
               -----------------                                             
Executive for all reasonable first-class travel and other expenses actually
incurred by or paid by the Executive during the Term in the performance of the
Executive's services under this Agreement, upon presentation of expense
statements or vouchers or such other supporting information as the Company
customarily may require of its officers.

          3.4  Vacation.  During the Term, the Executive shall be entitled to a
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vacation period or periods customarily accorded senior executives of the Company
during each year of the Term, which in any event shall not be less than four (4)
weeks per calendar year.  Vacation time not used by the end of a calendar year
shall be forfeited.

          3.5  Fringe Benefits.  During the Term, the Executive will participate
               ---------------                                                  
in all plans now existing or hereafter adopted by the Company for its management
employees or for the general benefit of its employees, such as any pension,
profit-sharing, bonus, stock option or other incentive compensation plans, life
and health insurance or other insurance plans and benefits on the same basis and
subject to the same qualifications as other executive officers.

          3.6  Additional Benefits.  During the Term, the Executive shall be
               -------------------                                          
entitled to such other benefits as are specified in Schedule II to this
Agreement.

     4.   Termination.
          ----------- 

          4.1  Death; Disability.  If the Executive shall die during the Term,
               -----------------                                              
of if during the Term the Executive shall become physically or mentally
disabled, whether totally or partially, such that the Executive is unable to
perform the Executive's principal services hereunder for a period of more than
180 consecutive days, the Term shall terminate and no further amounts or
benefits shall be payable hereunder.

          4.2  Cause. The Term may be terminated by the Company upon notice to
               -----                                                          
the Executive upon the occurrence of any event constituting "Cause" as defined
herein.  As used herein, the term 

                                      -3-
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"Cause" means: (i) the Executive's willful and intentional failure or refusal to
perform or observe any of his material duties, responsibilities or obligations
set forth in this Agreement; provided, however, that the Company shall not be
                             --------  ------- 
deemed to have Cause pursuant to this clause (i) unless the Company gives the
Executive written notice that the specified conduct has occurred and making
specific reference to this Section 4.2(i) and the Executive fails to cure the
conduct within thirty (30) days after receipt of such notice; (ii) any willful
and intentional acts of the Executive involving malfeasance, fraud, theft,
misappropriation of funds, embezzlement or dishonesty affecting the Company; or
(iii) the Executive's conviction of an offense which is a felony in the
jurisdiction involved.

          4.3  Good Reason.  The Term may be terminated by the Executive upon
               -----------                                                   
notice to the Company of any event constituting "Good Reason" as defined herein.
As used herein, the term "Good Reason" means the occurrence of any of the
following, without the prior written consent of the Executive: (i) assignment of
the Executive to duties materially inconsistent with the Executive's positions
as described in Section 1.1 hereof, or any significant diminution in the
Executive's duties or responsibilities, other than in connection with the
termination of the Executive's employment for Cause, disability or as a result
of the Executive's death, or by the Executive other than for Good Reason; (ii) a
change in the location of the Executive's principal place of employment to a
location outside of New York City; (iii) any material breach of this Agreement
by the Company which is continuing; provided, however, that the Executive shall
                                    --------  -------                          
not be deemed to have Good Reason pursuant to clauses (i) and (iii) above unless
the Executive gives the Company written notice that the specified conduct or
event has occurred and the Company fails to cure such conduct or event within
thirty (30) days of receipt of such notice.

          4.4  By Executive without Good Reason or by the Company without Cause.
               ----------------------------------------------------------------
Either party hereto shall have the right to terminate the Term prior to its
scheduled termination, as noted in Section 2.1 hereof, upon thirty (30) days
prior written notice to the other party hereto.

          4.5  Change in Control. If on or after the date hereof, and prior to
               -----------------                                              
the end of the Term, there occurs a "Change in Control" (as defined in the
Credit Agreement, dated on or about the date of the Acquisition, by and among
Toy Biz, Inc. (to be renamed Marvel Enterprises, Inc.), the Guarantors party
thereto, the Lenders party thereto, the Issuers referred to therein and UBS AG,
Stamford Branch, and Warburg Dillon Reed LLC), the Executive shall have the
right, at any time within thirty (30) days of obtaining knowledge of such Change
in Control, to give notice to the Company of termination of the Term as of a
date 

                                      -4-
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(which shall not be earlier than ten (10) days from such notice) to be specified
in such notice, and the Term shall terminate on the date so specified.

          4.6  Severance. (a) If the Term is terminated upon the Executive's
               ---------                                                    
death or disability, by the Company for Cause or by the Executive pursuant to
Section 4.4 hereof, the Executive shall be entitled to receive his Base Salary
and any additional benefits provided hereunder at the rates provided in Sections
3.1 and 3.6 hereof to the date on which such termination shall take effect.

     (b)  If the Term is terminated by the Executive for Good Reason, by the
Company other than for Cause, or pursuant to a Change in Control, the Executive
shall be entitled to: (i) a lump sum payment equal to a sum which is the greater
of (w) the compensation due to the Executive under this Agreement until the
scheduled termination of the Term, as noted in Section 2.1 hereof, or (x) the
amount equal to the continuance of compensation due to the Executive under this
Agreement for one (1) year after the date of such termination; and (ii)
continuation of all other benefits provided by the Company to the Executive
hereunder for the greater of (y) the period until the scheduled termination of
the Term or (z) one (1) year after the date of such termination.  In addition,
all equity arrangements provided to the Executive hereunder or under any
employee benefit plan of the Company shall continue to vest for the greater of
the period until the scheduled termination of the Term or one (1) year after the
date of such termination.

     (c)  The amounts required to be paid and the benefits required to be made
available to the Executive under this Section 4.6 are absolute.  Under no
circumstances shall the Executive, upon the termination of his employment
hereunder, be required to seek alternative employment and, in the event that the
Executive does secure other employment, no compensation or other benefits
received in respect of such employment shall be off-set or in any other way
limit or reduce the obligations of the Company under this Section 4.6.

     5.   Protection of Confidential Information; Non-Competition
          -------------------------------------------------------

          5.1  In view of the fact that the Executive's work for the Company
will bring the Executive into close contact with many confidential affairs of
the Company not readily available to the public, as well as plans for future
developments by the Company, the Executive agrees:

               5.1.1  To keep and retain in the strictest confidence all
confidential matters of the Company, including, without limitation, "know how",
trade secrets, customer lists, pricing policies, operational methods, technical
processes,

                                      -5-
<PAGE>
 
formulae, inventions and research projects, and other business affairs of the
Company, learned by the Executive heretofore or hereafter, and not to disclose
them to anyone outside of the Company, either during or after the Executive's
employment with the Company, except in the course of performing the Executive's
duties hereunder or with the Company's express written consent; and

          5.1.2  To deliver promptly to the Company on termination of the
Executive's employment by the Company, or at any time the Company may so
request, all memoranda, notes, records, reports, manuals, drawings, blueprints
and other documents (and all copies thereof) relating to the Company's business
and all property associated therewith, which the Executive may then possess or
have under the Executive's control.

     5.2  (a) During the Term, and for a period of one (1) year after he
ceases to be employed by the Company under this Agreement or otherwise, if such
cessation arises as a result of a circumstance described in Section 4.2 hereof,
or as a result of termination of the Term by the Executive pursuant to Section
4.4 hereof, the Executive shall not, directly or indirectly, enter the employ
of, or render any services to, any person, firm or corporation engaged in any
business competitive with the business of the Company or of any of its
subsidiaries or affiliates (except to the extent provided in Section 1.1 with
respect to the Executive's activities on behalf of Associates or the Prior
Commitments); the Executive shall not engage in such business on the Executive's
own account (except to the extent provided in Section 1.1 with respect to the
Executive's activities on behalf of Associates or the Prior Commitments); and
the Executive shall not become interested in any such business, directly or
indirectly, as an individual, partner, shareholder, director, officer,
principal, agent, employee, trustee, consultant, or in any other relationship or
capacity; provided, however, that nothing contained in this Section 5.2 shall be
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deemed to prohibit the Executive from acquiring, solely as an investment, up to
five percent (5%) of the outstanding shares of capital stock of any public
corporation.

          (b) For a period of six (6) months after the Executive terminates the
Term pursuant to Section 4.4 or 4.5 hereof, the Executive shall not, directly or
indirectly, undertake or otherwise be involved in any media or toy projects
which were under active development or consideration by the Company at the time
of the termination of his employment.

     5.3  If the Executive commits a breach, or threatens to commit a
breach, of any of the provisions of Sections 5.1 or 5.2 hereof, the Company
shall have the following rights and remedies:

                                      -6-
<PAGE>
 
          5.3.1  The right and remedy to have the provisions of this Agreement
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the Company and that money damages will not provide an
adequate remedy to the Company; and

          5.3.2  The right and remedy to require the Executive to account for
and pay over to the Company all compensation, profits, monies, accruals,
increments or other benefits (collectively "Benefits") derived or received by
the Executive as the result of any transactions constituting a breach of any of
the provisions of Section 5.2 hereof, and the Executive hereby agrees to account
for and pay over such Benefits to the Company. Each of the rights and remedies
enumerated above shall be independent of the other, and shall be severally
enforceable, and all of such rights and remedies shall be in addition to, and
not in lieu of, any other rights and remedies available to the Company under law
or in equity.

     5.4  If any of the covenants contained in Sections 5.1 or 5.2 hereof,
or any part thereof, hereafter are construed to be invalid or unenforceable, the
same shall not affect the remainder of the covenant or covenants, which shall be
given full effect, without regard to the invalid portions.

     5.5  If any of the covenants contained in Sections 5.1 or 5.2 hereof,
or any part thereof, are held to be unenforceable because of the duration of
such provision or the area covered thereby, the parties hereto agree that the
court making such determination shall have the power to reduce the duration
and/or area of such provision and, in its reduced form, said provision shall
then be enforceable.

     5.6  The parties hereto intend to and hereby confer jurisdiction to
enforce the covenants contained in Sections 5.1 and 5.2 hereof upon the courts
of any state within the geographical scope of such covenants.  In the event that
the courts of any one or more of such states shall hold such covenants wholly
unenforceable by reason of the breadth of such covenants or otherwise, it is the
intention of the parties hereto that such determination not bar or in any way
affect the Company's right to the relief provided above in the courts of any
other states within the geographical scope of such covenants as to breaches of
such covenants in such other respective jurisdictions, the above covenants as
they relate to each state being for this purpose severable into diverse and
independent covenants.

     5.7  In the event that any action, suit or other proceeding in law or
in equity is brought to enforce the covenants contained in Sections 5.1 and 5.2
hereof or to obtain 

                                      -7-
<PAGE>
 
money damages for the breach thereof, and such action results in the award of a
judgment for money damages or in the granting of any injunction in favor of the
Company, all expenses (including reasonable attorneys' fees) of the Company in
such action, suit or other proceeding shall (on demand of the Company) be paid
by the Executive. In the event the Company fails to obtain a judgment for money
damages or an injunction in favor of the Company, all expenses (including
reasonable attorneys' fees) of the Executive in such action, suit or other
proceeding shall (on demand of the Executive) be paid by the Company.

     6.   Inventions and Patents.
          ---------------------- 

          6.1  The Executive agrees that all processes, technologies and
inventions, including new contributions, improvements, ideas and discoveries,
whether patentable or not, conceived, developed, invented or made by him during
the Term or for one year thereafter (collectively, "Inventions") shall belong to
the Company, provided that such Inventions grew out of the Executive's work with
the Company or any of its subsidiaries or affiliates, are related to the
business (commercial or experimental) of the Company or any of its subsidiaries
or affiliates or are conceived or made on the Company's time or with the use of
the Company's facilities or materials and; provided, further, however, that the
                                           --------  -------  -------          
foregoing shall not apply to any Inventions which are (a) assigned to Associates
and licensed to the Company by Associates pursuant to the Master License
Agreement, dated as of April 30, 1993, between Associates and the Company as
amended (the "Master License") or any license agreement entered into in
accordance therewith or (b) the Prior Commitments.  The Executive shall further:
(a) promptly disclose such Inventions to the Company; (b) assign to the Company,
without additional compensation, all patent and other rights to such Inventions
for the United States and foreign countries; (c) sign all papers necessary to
carry out the foregoing; and (d) give testimony in support of the Executive's
inventorship.

          6.2  The Executive agrees that the Executive will not assert any
rights to any Invention as having been made or acquired by the Executive prior
to the date of this Agreement, except for Inventions, if any, listed on Schedule
III attached hereto.

     7.   Intellectual Property.
          --------------------- 

          Except as provided in Section 6 above, the Company shall be the sole
owner of all the products and proceeds of the Executive's services hereunder,
including, but not limited to, all materials, ideas, concepts, formats,
suggestions, developments, arrangements, packages, programs and other
intellectual properties that the Executive may acquire, obtain, develop or
create in connection with and during the Term, free 

                                      -8-
<PAGE>
 
and clear of any claims by the Executive (or anyone claiming under the
Executive) of any kind or character whatsoever (other than the Executive's right
to receive payments hereunder). The Executive shall, at the request of the
Company, execute such assignments, certificates or other instruments as the
Company may from time to time deem necessary or desirable to evidence,
establish, maintain, perfect, protect, enforce or defend its right, title or
interest in or to any such properties.

     8.   Indemnification.
          --------------- 

          To the fullest extent permitted by applicable law, Executive shall be
indemnified and held harmless for any action or failure to act in his capacity
as an officer or employee of the Company.  In furtherance of the foregoing and
not by way of limitation, if Executive is a party or is threatened to be made a
party to any suit because he is an officer or employee of the Company, he shall
be indemnified against expenses, including reasonable attorney's fees,
judgments, fines and amounts paid in settlement if he acted in good faith and in
a manner reasonably believed to be in or not opposed to the best interest of the
Company, and with respect to any criminal action or proceeding, he had no
reasonable cause to believe his conduct was unlawful. Indemnification under this
Section 8 shall be in addition to any other indemnification by the Company of
its officers and directors.  Expenses incurred by Executive in defending an
action, suit or proceeding for which he claims the right to be indemnified
pursuant to this Section 8 shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of Executive to repay such amount in the event that it shall
ultimately be determined that he is not entitled to indemnification by the
Company.  Such undertaking shall be accepted without reference to the financial
ability of Executive to make repayment.  In addition, the Company shall use its
best efforts to obtain and maintain a directors' and officers' liability
insurance policy at a reasonable cost providing insurance coverage with respect
to claims made against officers and directors as to which they are entitled to
be indemnified by the Company.

     9.   Notices.
          ------- 

          All notices, requests, consents and other communica  tions required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been duly given if delivered personally, sent by overnight courier or mailed
first class, postage prepaid, by registered or certified mail (notices mailed
shall be deemed to have been given on the date mailed), as follows (or to such
other address as either party shall designate by notice in writing to the other
in accordance herewith):

                                      -9-
<PAGE>
 
          If to the Company, to:

               Toy Biz, Inc.
               685 Third Avenue
               New York, New York 10017
               Attention: Chief Executive Officer

          If to the Executive, to:

               Avi Arad
               6 Minute Man Hill
               Westport, CT  06880

     10.  General.
          ------- 

          10.1  This Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of New York applicable to agreements
made and to be performed entirely in New York, without regard to the conflict of
law principles of such state.

          10.2  The section headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.

          10.3  This Agreement sets forth the entire agreement and understanding
of the parties relating to the subject matter hereof and supersedes all prior
agreements, arrangements and understandings, written or oral, relating to the
subject matter hereof.  No representation, promise or inducement has been made
by either party that is not embodied in this Agreement, and neither party shall
be bound by or liable for any alleged representation, promise or inducement not
so set forth.

          10.4  This Agreement, and the Executive's rights and obligations
hereunder, may not be assigned by the Executive.  The Company may assign its
rights, together with its obligations, hereunder (i) to any affiliate or (ii) to
third parties in connection with any sale, transfer or other disposition of all
or substantially all of its business or assets; in any event the obligations of
the Company hereunder shall be binding on its successors or assigns, whether by
merger, consolidation or acquisition of all or substantially all of its business
or assets.

          10.5  This Agreement may be amended, modified, superseded, canceled,
renewed or extended and the terms or covenants hereof may be waived, only by a
written instrument executed by both of the parties hereto, or in the case of a
waiver, by the party waiving compliance.  The failure of either party at any
time or times to require performance of any provision hereof shall in no manner
affect the right at a later 

                                      -10-
<PAGE>
 
time to enforce the same. No waiver by either party of the breach of any term or
covenant contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such breach, or a waiver of the breach of any other
term or covenant contained in this Agreement.

     11.  Subsidiaries and Affiliates.
          --------------------------- 

          As used herein, the term "subsidiary" shall mean any corporation or
other business entity controlled directly or indirectly by the Company or other
business entity in question, and the term "affiliate" shall mean and include any
corporation or other business entity directly or indirectly controlling,
controlled by or under common control with the Company or other business entity
in question.

     12.  Royalties Under Master License.
          ------------------------------ 

          The Master License is hereby amended to provide that the Company's
royalty obligation to the Executive under the Master License for Marvel products
for which the Executive is the inventor of record, is fixed at $650,000 per
year, in lieu of the current four percent (4%) royalty rate (six percent (6%) on
sales FOB the Orient).  With respect to non-Marvel items for which the Executive
is the inventor or record, the terms of the Master License shall remain in
effect, with the Executive receiving a negotiated amount not to exceed five
percent (5%) of net sales.


     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.


                                     COMPANY:

                                     TOY BIZ, INC.


                                     By: /s/ Joseph M. Ahearn
                                        ---------------------------------------
                                          Name:
                                          Title:

                                     EXECUTIVE:

                                     /s/ Avi Arad
                                     ------------------------------------------
                                     Avi Arad

                                      -11-
<PAGE>
 
                                  SCHEDULE II
                                  -----------

Additional Benefits:
--------------------


          1.   The Company shall provide the Executive use of a Mercedes 500 SEL
or similar automobile, and a driver, selected by the Executive, for such
automobile.

          2.   The Executive shall be entitled to participate in the Company's
stock option plan at a level commensurate with Executive's salary level, title
and responsibilities, as determined by the Compensation Committee of the Board
of Directors of the Company.

          3.   With respect to each media project for which the Executive
performs significant services, the Executive shall be entitled to retain, in
addition to the Base Salary and other benefits provided for hereunder, all
Executive Producer and/or Producer fees customarily payable by the licensee
under any television, motion picture or home video license entered into by the
Company during the Term.  Such fees shall be not more than $10,000 per episode
for animated television projects and not more than $250,000 for any one motion
picture project.


Avi Arad
<PAGE>
 
                                 SCHEDULE III
                                 ------------


                                  Inventions