How to save and when not to save on legal — employees and contractors for early stage startups

If you are hiring people, you should start considering legal budget. You don’t necessarily need to spend tens of thousands of dollars on lawyers or policies or handbooks yet, but you should understand that hiring means liability. Startups have to fire people, as much as none of us want to. The more you can do when feelings are warm and fuzzy (at the beginning) to minimize that liability the better off your business will be.

It’s true that Rippling, Gusto, Pulley, etc. will send forms for employee hires. They may or may not be good forms for you, but they are not all the forms you need. Understand that these services are not providing you with legal advice, and don’t necessarily deal with things liek IP assignment, equity compensation, or securities registrations.

Note that different states have drastically different laws about things like non-competes and non-solicitation. The best employment terms for a company in Georgia and the best ones in California are different, and you shouldn’t use equity comp for anyone unless you’re properly set up. You may choose to ignore legal differences between such forms or certain compliance efforts for cost reasons early, and we get it. If you don’t have the money, you don’t have the money..but ask what money you’re using to hire people with.

People would be shocked at how many lawsuits from early employees claiming wrongful termination kill startups (you never hear this when it happens, even as an investor). Hire slowly and fire quickly is good advice, if you do it right. Doing it right means paperwork that sets the terms.

DO NOT WAIT until people start to:

• tell them their employment is at-will in writing (usually in an offer letter)
• tell them about sick leave and vacation leave policies
• get them to sign a confidential information and invention assignment agreements
• tell them any option grants are subject to board approval and vesting (PS — don’t offer options until you set up an option plan)

A few (of the main) reasons why:

• IP assignments are not enforceable without additional consideration (money) if signed after employment starts
• You can’t really make employment at-will later, and if you try they employee can still claim you have an oral contract to pay them for years. They may not succeed, but they will cost you lot of lawyer money to prove them wrong/settle.
• Joe shows up on day 1 on work and opens up the code base for four hours. The, Joe announces the company is stupid and quits. This really happens more than you think. Joe just stole your code and there is not much you can do about it (and nothing you can do cheaply) even if Joe turns around and starts a competitor. But with a CIIA, you can easily shut Joe down.

Did I mention beware promising options you’re not set up to paper properly? — there are securities compliance policies, and one of the most common reason I see exit valuations go down is liabilities to optionholders that wouldn’t be liabilities if founders had used the right paperwork.

The other most common reason companies die and/or get devalued from preventable legal mistakes is worker classification. State laws and penalties for misclassification differ drastically, but here’s the TLDR:

• Contractors work for you and many others, have their own equipment, work on specific projects, supervise themselves and choose their own hours.
• Employees work only (generally) for you, use equipment you buy for them work on various things you may decide later, and work hours you specify.

Both of them need contractors that ensure confidentiality and assign IP to you.

So, try to do something to achieve this. AutoGC chooses the right form for you and sends it in a way that’s designed to get your legal right from the start. Our form(s) and processes are optimized based on what we know about you at the direction of our law firm, and our system alerts you to compliance obligations in real time. But, if you don’t have the money for a subscription, you can dig through Cooley GO or Orrick’s startup forms libraries to be better than nothing.

This post is not legal advice and I am not your lawyer :) If you want me to be your lawyer, your can engage us and our software support through story.law.