The documents every hire signs
Three documents do most of the work. An offer letter states the position, start date, salary, the at-will nature of the employment and any equity to be granted "subject to board approval"; it should not promise terms the company cannot deliver, and it should not read as a contract for a fixed term unless that is intended. A confidential information and invention assignment agreement assigns to the company everything the employee creates in the course of employment and protects its confidential information; without it, the company may not own its own code. A handbook or written policies, even a short one, covers paid leave, harassment, expenses and equipment, and states the rules that state law requires employers to communicate. Use the same forms for everyone, so that an investor's diligence does not turn up five versions.
Equity: plan, valuation, grant
Option grants cannot be made casually. The company first adopts an equity incentive plan, approved by the board and the stockholders, that reserves a pool of shares. Each grant is then approved by the board, with an exercise price no lower than the fair market value of the common stock on the grant date—which for a private company means a 409A valuation, typically refreshed annually and after each financing. Grants are documented with a notice and agreement that state the vesting schedule, commonly four years with a one-year cliff, and the post-termination exercise window. Incentive stock options have tax advantages for employees but limits on who can receive them and how much may vest per year; nonstatutory options have none of those limits. Promising a percentage of the company in an offer letter, instead of a number of shares subject to the plan, creates disputes when the share count changes.
Employee or contractor
Startups routinely engage early contributors as contractors because it is simpler and cheaper. The classification is not the company's to choose; it follows from the relationship. California applies a strict test under which a worker is an employee unless the company shows the worker is free from its control, performs work outside the company's usual business and runs an independent business; Washington and federal agencies apply their own multi-factor tests, which reach similar results for people who work full time on the core product under the company's direction. Misclassification exposes the company to back taxes, penalties, wage claims and, in a financing, a diligence problem. Contractors who are genuinely independent should sign an agreement that assigns the work product to the company, because the default rule for contractors is otherwise.
Work authorization and the I-9
Every employer must complete an I-9 for each employee within three business days of the start date, examining documents the employee chooses from the official lists; asking for specific documents or questioning a candidate about citizenship or visa status in the interview can violate anti-discrimination rules. Beyond the form, a startup hiring international talent should know the realistic routes: a recent graduate on OPT and then STEM OPT, which requires the employer to enroll in E-Verify; an H-1B transfer from another employer, which can begin on receipt of the new petition but is subject to the lottery for first-time H-1B holders; an O-1 for candidates with a record of recognition; and the fact that a startup is almost never a cap-exempt employer. Founders on visas themselves must make sure their own status permits the work they are doing, which is a separate question from the company's hiring.
Hiring outside the United States
A U.S. company that hires an engineer in another country is subject to that country's employment, tax and social-security rules, whether it notices or not. The practical options are a local subsidiary, an employer-of-record service that becomes the legal employer in that country, or a genuine contractor arrangement where that is lawful. In each case, the assignment of intellectual property should be drafted to be enforceable under the law of the country where the work is done, not only under Delaware law, and personal-data obligations should be checked. Paying a foreign worker through the U.S. payroll as if they were domestic is the arrangement most likely to cause trouble later.
State rules that surprise founders
Employment law is largely state law, and the states where startups cluster have rules of their own. Washington limits non-competition agreements to employees earning above an inflation-adjusted salary threshold and requires that the terms be disclosed before an offer is accepted; California bans employee non-competes almost entirely. Washington also requires pay ranges in job postings and provides statutory paid sick leave; California and Washington both have specific rules on final paychecks, expense reimbursement and meal breaks. None of this is difficult to comply with when it is built into the templates at the start, and all of it is costly to fix after a complaint.
References
How Lumen Law & Co. can help
Early hiring decisions affect diligence, intellectual property ownership, equity incentives, and immigration compliance.
- Review offer letters, employment and contractor agreements, confidentiality, and IP assignments.
- Discuss equity grants, vesting, worker classification, and documentation.
- Assist with planning work-authorization and immigration issues for international hires.