Early-stage companies frequently overlook many fundamental legal needs and issues surrounding the onboarding of service providers. Here are a few considerations for early-stage companies as they engage workers, and tips to avoid pitfalls that could lead to significant liability.
Agreements for Service Providers
All service providers should enter into written agreements before the service relationships begin (or at least as soon after the relationship begins as possible). Executing appropriate agreements as early as possible can avoid disputes regarding service terms, intellectual property or equity ownership questions, and other matters essential to the success of an early-stage company.
Offer Letters for Employees
All employees, including founders and other executives, should sign some sort of employment agreement. For U.S. employees, the agreements can be simple – for example, most start-ups use two-page offer letters – as long as all key terms are included. For more complex hires, these same form letters can be tailored to include more detailed terms.
Confidentiality and Inventions Assignment Agreements for Employees
It is essential that every employee (including founders and other executives) sign a confidential information and inventions assignment agreement. One form of this agreement can be used for all employee hires in each state. Companies might need or want to modify the forms for employees in different states, based on those states’ laws and regulations. For example, some states require very specific language in order for an employer to have an effective assignment of IP rights. In addition, certain states allow broad post-employment restrictive covenants, such as non-competition and/or non-solicitation provisions, while others do not.
Independent Contractor Agreements for Consultants
All contractors and consultants should sign independent contractor agreements. The agreement is different from, and often more complex than, the employee offer letters, and should include confidential information and invention assignment provisions similar to those in the confidentiality and inventions assignment agreements used with employees We would recommend that companies have different forms of such agreements for different types of contractors (for example, technical versus non-technical consultants) in order to avoid complicated legal agreements for those consultants or advisors who will not play a role in creating critical company intellectual property.
Interns and Other Service Providers
For other service arrangements, such as summer internships (paid or unpaid), the service provider should sign a form of offer letter or services agreement, and in some circumstances, a special form of confidential information and inventions assignment agreement. Interns and other such relationships are special situations, and the standard offer letters or consulting agreements may not be appropriate.
A Note About Service Agreements
Some of the most technical and confusing areas of workforce management are compliance with federal and state laws regulating the classification of service providers as employees, independent contractors, or interns. Because companies have liability for tax withholding and benefits to employees, misclassification of employees as contractors can lead to meaningful liability. There are multiple factors that are considered in these classifications and counsel can assist with the analysis.
While an agreement alone will not eliminate the risk of misclassification, it can help. Thus, it is important to use the forms appropriately for their intended service provider type. For example, using a standard employee confidentiality and inventions assignment agreement for an intern or an independent contractor could support a determination that the service provider was misclassified and should have been provided the benefits of an employee.)
Putting in place employment policies and procedures is often an afterthought for young companies that are trying to get their business up and running. However, certain policies are required by state and federal law. Other policies are recommended to set the right tone for the company and to help minimize liability down the road. We recommend that early stage companies put in place an Employee Handbook or Manual early on in the development of the company. The handbook will need to be updated with changes in the law and as the company grows, but even start-ups should have a handbook in place.
Young companies often increase legal complications by not paying cash compensation to founders or early executives. Often such arrangements run afoul of state and federal wage and hour laws –even when employees are willing to work without cash compensation. Damages for unpaid wage claims can include the unpaid wages (for at least minimum wage), additional amounts for unpaid overtime wages, a variety of penalties (which can be multiples of the unpaid wages, in addition to other categories of penalties), misdemeanors, and attorneys’ fees.
There are a number of ways to avoid violations of wage and hour laws, or reduce the risk and potential liability of compensation arrangements, without paying executives a market rate. Ideally, your company will implement those measures before having employees work for free. However, if your company has had workers who have worked without pay for some period of time, there also are ways to limit your exposure and to reduce future liability. Early stage companies should consult with employment attorneys early in the process to assist with the onboarding of early executives and to implement consistent and reliable practices that will reduce these risks.
For early stage companies, and candidates who are willing to work for them, equity compensation is often the key component of a compensation package. Equity incentive plans, and the agreements and grant notices that go along with them, should be some of the first corporate documents put in place. It is also important to understand and keep in mind which company players must approve equity grants (often the Board), how to set the exercise price of any options and how such grants or the terms of such equity can be modified, both for individual circumstances and in the event of employment separation.