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What do I need to know before I start hiring?

By Dan Offner

StartupProgram.com

Many startups are born when a few friends pull together behind an idea and build the beginnings of a business as a small, agile team. But a group of friends can bring a business only so far; hiring to grow the team is inevitable. 

Here are some tricks of the trade we want to share with you:

1. Implement a Stock Incentive Plan BEFORE Hiring Your First Employee

Fledgling startups are generally burning cash, not generating revenue, so big salaries are on the table of the list of benefits a startup can use to attract employees. Rather, you can entice potential employees with cheap stock or stock options and the allure of a potentially big payout when the startup makes a stellar exit. 

Putting a stock incentive plan in place when a company is first formed gives the founders a powerful employee recruiting tool. Additionally, you can use time based vesting to retain and motivate your employees to stick it out for the long run. 

Adopting a stock incentive plan at formation reduces the legal risks and administrative headaches of granting stock as compensation to your employees and advisors.  When a company properly adopts a stock incentive plan it simplifies the process of complying with securities laws.  Additionally, by reserving a portion of stock that you can quickly and efficiently grant, you lock your cap table and avoid potentially giving up more equity to your first employees, advisors and contractors 

2. Use Offer Letters When Hiring

The details of the terms of employment should be included in a simple offer letter.  An offer letter should be simple, laying out the terms of the employment offer, including a job description, who the prospective employee would be reporting to, working relationships with other employees, the base pay, equity compensation to be offered (not granted, see below), and any other benefits the employee might be eligible for. 

Employee offer letters do not and should not grant stock options or restricted stock, but offer letters may include references to the stock or option grants (commonly found in the salary and compensation section of the agreement). 

A signed offer letter does not mean the individual or entity has been given stock. That’s accomplished with a  stock grant agreement that was approved by the board when it was adopted with the company’s stock incentive program, such as a stock option grant, paired with the required approval by the board of directors.

3. Make Sure You Own All of the Intellectual Property An Employee Makes for the Company 

By law, all intellectual property is owned by the inventor or creator of the intellectual property.  Paying someone to create it for you does not make you the owner!  That is true even if they are your employee.   Therefore, it is extremely important to have each new employee – as well as each contractor, advisor and founder — sign an agreement that states the company owns all of their work product.  That means an employee should sign a confidentiality invention assignment agreement (CIAAs). A properly drafted CIAA will make sure that your startup owns any intellectual property developed by the employee during the course of his or her work for the company.

CIAAs often also require that employees not disclose confidential or proprietary company information to others and do not use company IP for their own benefit (and do not use other companies’ proprietary information in the course of their work). 

4. Be Aware of the Potential Risks of Misclassifying an Employee as a Contractor When Hiring

Many people assume that if you hire someone using an independent contractor or consulting agreement that the employer does not have to withhold employment taxes or pay overtime. That is not true. 

Determining whether a hire is an employee or contractor is a fact based analysis and the type of agreement that a person signs is not a determining factor.  Misclassifying an employee and contractor comes with  tax and labor-law risks.

The IRS, in determining whether someone is an employee or an independent contractor, uses a common-law test which generally looks at the level of control and independence a contractor maintains in his or her performance of the work they are being paid to perform. In recent years, California moved away from the common-law test and has enacted an even stricter test to determine employee classification. 

Learn The Right Way To Hire And Avoid Hiring Pitfalls

Venture Law 101, part of our StartupProgram.com Academy online lecture series, will walk you through all the considerations that come with growing your startup’s team. You’ll also learn how a stock incentive plan works, how officers of a company are chosen and more. 
Need help putting together with offer letters, stock purchase agreements, and other hiring-related documents? Through our partner law firm O&A, P.C., StartupProgram.com Professional Services can generate the necessary documents, as well as create all the necessary forms needed to incorporate an

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