What Agreements Should Startups Have With Their Employees?

A startup’s greatest strength is its team, and the foundation of this team’s success starts with employment agreements. These documents for startups establish clear expectations and maintain a positive employer-employee relationship. They help reduce misunderstandings and legal risks by providing clarity and transparency, ensuring that both parties understand their rights and obligations, and reducing the likelihood of disputes.

These agreements also protect the startup’s proprietary information, safeguarding its competitive advantage. Additionally, they demonstrate professionalism and a commitment to fair employment practices, improving the startup’s reputation and attractiveness to potential employees and investors.

This article provides an overview of the agreements that startups should have with their employees, including an employment offer letter, Confidential Information and Invention Assignment Agreement (CIIAA), equity award, compensation and benefits package, and employee handbook. It also provides guidance on the types of provisions typically included in each agreement and why they are important.

Founders should work with legal counsel to draft each of these agreements, as it is crucial to get them right. If you need counsel, please reach out to us here.

Employment Offer Letter

An employment offer letter is a formal agreement sent by an employer to a candidate selected for employment in a startup. It outlines the main terms and conditions of employment and serves as a legally binding bilateral agreement once accepted by the candidate. Here are some key provisions generally included in an offer letter.

1. Job Title and Description. The letter should clearly state the position the candidate is being hired for and may include a brief description of the job duties and expectations.
2. Compensation. This section details the employee’s base salary or hourly wage, as well as any bonus or commission structures, if applicable.
3. Equity Grant. Many startups offer equity grants as part of their compensation packages. The letter should detail the terms of any equity compensation, including vesting schedules.
4. Start Date. The agreed-upon commencement date of the employment should be clearly stated.
5. Working Hours and Location. This outlines the expected working hours and the location of work, particularly important for remote or flexible work arrangements.
6. Benefits and Perks. The letter should include a summary of benefits the employee is eligible for, such as health insurance, retirement plans, vacation time and other perks.
7. At-Will Employment. In the United States, most employment is “at-will,” meaning either party can terminate the employment relationship at any time for any reason. If this is the case, the offer letter should state it clearly.

Before signing an employment offer letter, candidates should thoroughly review all the provisions, ask for clarifications if needed and may consider seeking legal advice.

CIIAA

The CIIAA (sometimes called a Proprietary Information and Inventions Agreement, or PIIA, as well as a Tech Assignment Agreement) is critical for any startup or technology company that wants to protect its intellectual property and confidential information. This is an underrated but essential agreement for every startup founder and employee.

Here’s why a CIIAA is important:

• Protecting Confidential Information. A startup may have sensitive information that is crucial to its competitive advantage. A CIIAA requires that employees and contractors keep this information confidential.
• Intellectual Property Ownership. When an employee or contractor develops something new while working for the company, it could be a product, a piece of software, a business strategy, etc. The CIIAA helps ensure that the intellectual property rights for these inventions remain with the company and not the individual.
• Preventing Competitor Advantage. Without a CIIAA, an employee could potentially take the knowledge and expertise gained at your startup and use it to benefit a competitor or start a competing business.
• Investor Relations. Investors are often more willing to invest in a company that has taken steps to protect its intellectual property and confidential information. Having a CIIAA in place can show investors that you are serious about protecting your business.
• Legal Recourse. In case a former employee or contractor violates the agreement, a CIIAA provides the company with more solid ground for legal action.
• Facilitating Corporate Transactions. When a startup is involved in a merger, acquisition or is raising funds, the other party will conduct due diligence. Having a CIIAA in place can make these processes smoother as it shows that the startup has taken steps to secure its assets.
• Clarifying Expectations. A CIIAA can help in setting clear expectations with employees and contractors regarding what they can and can’t do with the information and resources they access during their tenure with the company.

If you’d like to learn more about the CIIAA, click here.

Equity Award

An equity award is an ownership stake in the company. Startup equity compensation can take many forms, but the most common are restricted stock and stock options. Here are the basic differences between the two.

• Restricted Stock. Restricted stock, sometimes called a Restricted Stock Award (RSA), is a grant of common stock for a startup. It is often given to founders or employees in place of or in addition to cash salaries. Restricted stock has two primary restrictions. First, it has a vesting requirement, which means that an employee must earn or “vest” the equity over time. (To learn more about vesting schedules, click here.) The second restriction is on transfer. Generally, employees cannot sell or transfer their shares except under certain conditions outlined in the restricted stock agreement. To learn more about restricted stock, click here.
• Stock Options. A stock option in a startup is a form of equity compensation that enables employees to buy company shares in the future at a fixed price, usually the current fair market value. Unlike restricted stock, which grants ownership of the stock to the recipient, stock options simply grant the right to purchase shares in the future. This compensation is often granted to motivate and reward employees, providing them with the opportunity to profit from any future growth in the company’s value. If you would like to learn more about stock options, click here.

Regardless of the type of equity award, it’s important that the terms of the agreement are well-documented, including:

• Type of equity award
• Number of shares
• Vesting schedule
• Vesting commencement date
• Fair market value of shares

It’s essential that you work with legal counsel to draft clean and clear equity awards. If you’re looking for counsel, feel free to reach out to us here. If you’d like to learn more about how equity compensation works at startups, click here.

Compensation and Benefits Package Details

Generally, a startup’s employment offer will outline benefits and potential perks. However, the details will live in supplementary documents like an employee handbook or a separate benefits policy. These documents should cover health insurance, retirement plans, vacation and sick leave, among others.

Consider Developing a Handbook

Developing employee handbooks can provide many advantages for startups. Handbooks serve as a comprehensive resource that outlines the company’s policies, procedures and expectations. They provide clarity and consistency in communication, ensuring that employees have access to important information regarding their rights, benefits, code of conduct and other relevant guidelines.

Handbooks can also help to establish a strong company culture and promote consistent practices across the organization. They define the company’s values, mission and vision, fostering a sense of belonging and alignment among employees. By outlining expectations and standards of behavior, handbooks contribute to a positive work environment and help mitigate potential conflicts or misunderstandings.

Furthermore, handbooks play a crucial role in legal compliance. They provide a platform to communicate important policies related to equal employment opportunity, harassment prevention, safety protocols and other legal obligations. Having documented policies and procedures can protect the startup in case of disputes or legal challenges, as it demonstrates that the company has taken proactive steps to establish and communicate its guidelines.

Conclusion

In conclusion, employment agreements are a critical component of any startup’s success. By establishing clear expectations and protecting the startup’s intellectual property, these agreements not only reduce legal risks but also foster positive employer-employee relationships. Startups should work with legal counsel to draft these agreements and ensure compliance with federal and state laws and regulations. By taking the time to create employment agreements that are tailored to the startup’s needs, founders can build a strong team that is committed to the company’s success.