Startups with Employees: The 5 Things You Need to Handle at the Outset of Your Business

Starting a new business is a fun and exciting experience. For many people, however, this excitement can cause them to make some serious legal errors in the initial days, weeks, and months of the business, which could come back to haunt them for years to come. This is especially true if you are starting your new business with employees who will be working for you.

These employees are taking a serious risk by working for a start-up, so it behooves you to do everything possible to ensure your business is successful and the employees are treated in accordance with the company’s values and its agreement with them. The following are five important things that you need to take care of before, or immediately after, your business is created.

Stock Options & Incentives
New businesses often offer employees some special incentives because they took on the added risk of working for a brand-new company. It is not enough to simply promise these employees a certain number of shares, or a percentage of ownership, or anything else. You must get these agreements in writing, and have them signed by you and the employees. This is not only important for ensuring everything is legally enforceable, but also to avoid any potential misunderstandings that could cause conflict down the road. We’ve written about this in greater detail here.

Vesting-Related Issues
Whether you are offering your employees stock options or other forms of equity (e.g. Founders Stock), you need to decide what, if any, vesting program will be offered. You likely don’t want to give an employee shares of your business if they only work for you for a couple weeks. Consider having the vesting schedule take place over a period of several years. Your employees could become partially vested each year, which will help to incentivize them to stick with the company. Read more about this topic here.

Invention Assignment
If your business involves any type of inventing or innovating (including developing software, hardware, products, trade secrets or other intellectual property), you need to make sure that it is clear that the work done by your employees will belong to the company. If an employee invents something novel, you don’t want them to be able to take their invention and start their own business with it. Likewise, thorough investors are going to want to see that all intellectual property is clearly owned by the company.

Properly Classifying Independent Contractors
Employers that have independent contractors doing work for the business need to make sure to make the distinction between employee and independent contractor crystal clear and congruent with the law’s requirement for such classification. Contractors have much different rights than an employee would, so you need to have these clearly laid out. It is also important to make sure each person is aware of their employment status when they begin working.

Proper Employment Contracts
Having things like non-compete contracts, non-solicitation, and non-disclosure contracts in place is often a good idea for new companies. There are a few different types of employment contracts available, so take the time to consider each one and determine if it is right for your new company. Likewise, these agreements may not be enforceable under applicable law in all circumstances. Call us if you need help understanding your options, or if you need contracts drafted.

With employment contracts, and all the other steps listed here, it is a good idea to discuss your options with an experienced corporate lawyer. Contact Doida Law Group to discuss your new business, and how we can help you make it a success for yourself, and your employees.

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