What agreements should startups have with their employees?

What should the offer letter include?

The offer letter is the employee’s main agreement with the company. It should state the job title, the start date, base salary or hourly wage, any bonus or commission, the benefits the employee is eligible for, where the person will work, and whether the role is exempt or nonexempt. If you’re offering equity, state it as a number of shares, the type of award, and the vesting schedule, and say the grant is subject to board approval.

The letter should say clearly that employment is at will, meaning either side can end it at any time, and it shouldn’t promise a term of employment or include a probation period. Make the CIIAA a condition of the offer. See Startup Employment Contract Guide and Exempt vs Nonexempt Employees.

If you’re hiring salespeople in California, commissions must be set out in a written commission plan that the employee signs. Other states have their own rules on commissions and wage notices, so check before you hire.

Should I use offer letters or formal employment agreements?

For everyone below the executive level, use an offer letter. A long-form employment agreement adds terms you don’t want to negotiate with every hire, such as “cause” definitions, notice periods and severance, and it can undercut at-will employment. Save employment agreements for senior executives, where those terms are expected. See our Employment Agreement service.

Why does every employee need a CIIAA?

The CIIAA (also called a PIIA or invention assignment agreement) does two things. It requires the employee to keep the company’s confidential information confidential, during and after employment, and it assigns to the company the IP the employee creates in their work. Without it, the company may not own its own product. Investors and acquirers check for signed CIIAAs from every founder, employee and contractor in due diligence.

Have the CIIAA signed on or before the first day of work. Founders sign one too. See CIIAA: What It Is and How It Works, Who Owns Startup IP? and our Confidential Information and Invention Assignment Agreement service.

How is employee equity documented?

The offer letter describes the equity, but the grant itself happens only when the board approves it, followed by an award agreement. Early hires, before the company’s first 409A valuation, typically buy restricted stock under a restricted stock purchase agreement. After that, US employees usually get incentive stock options (ISOs) and everyone else gets nonqualified stock options (NSOs) under a stock option agreement.

Each award agreement should state the type of award, the number of shares, the vesting schedule and vesting commencement date, and the purchase or exercise price. Two steps are where most mistakes happen. An employee who buys restricted stock that vests over time needs to file an 83(b) election with the IRS within 30 days, with no extensions. And options need an exercise price at fair market value, which in practice means a current 409A valuation. See Startup Equity Compensation, 83(b) Election and 409A Valuation.

Do later documents replace the offer letter?

Each document governs its own subject. The offer letter still governs salary, title and at-will employment. The CIIAA governs confidentiality and IP. The equity award agreement governs the stock or options. Signing an RSPA or a CIIAA doesn’t replace the offer letter, including a founder’s. Use an entire-agreement clause in each document that limits it to its own subject, and if terms such as salary or title change later, document the change in a short amendment or a new offer letter.

Is the employee handbook an agreement?

No. A handbook is a set of company policies, such as leave, expenses, anti-harassment and equal employment opportunity, not a contract. It should say so, and say that it doesn’t change at-will employment. Employees sign an acknowledgment that they received and read it. Most startups need a handbook at about 20 employees. See Startup Employee Handbook.

What paperwork isn’t an agreement but is still required?

Every new employee also completes government paperwork: Form I-9 to verify work authorization, Form W-4 for federal withholding (plus any state equivalent), and any state wage notice. The company files a new-hire report with the state. See Employee Onboarding for Startups.

What about contractors and advisors?

Contractors and advisors aren’t employees, so they don’t get offer letters. A contractor signs an independent contractor agreement and an advisor signs an advisor agreement, and both should include confidentiality and an assignment of IP to the company. See Startup Contractor Agreement and Startup Advisor Agreement.

If you’d like help putting your employee documents in place, contact us.