October 26, 2026
Giving equity to the people who help build your startup is a legal process, not a handshake: adopt an equity plan with an option pool, grant restricted stock while the stock's value is near zero and stock options once it isn't, get a 409A valuation before the first option grant, and have the board approve every grant as a specific number of shares. Hiring works the same way: each person you bring on needs the right agreement for their role, and each agreement should assign their work to the company. Get these steps right and your first financing's diligence goes quickly.
Making your first hires is one of the best moments in a startup's life: it's when the company stops being just the founders. We've been counsel to early-stage founders since 2008, and we've seen the same handful of problems again and again, from an offer letter that promises "1% of the company" to a contractor who never signed over the code they wrote. This guide walks through equity and hiring in the order you'll live it after formation: the equity plan, choosing what to grant, the 409A, making a grant, what happens when someone leaves, advisors, and hiring employees and contractors. It picks up where our Founder Guide: Incorporating Your Startup leaves off, which covers founder stock, founder vesting and the founder 83(b) election.
Key takeaways
The equity plan, or equity incentive plan, lets the company grant equity to employees, advisors, directors and contractors. It reserves a set number of shares, called the option pool, sets the general rules for awards and authorizes the board to make grants. Each grant then gets its own short agreement setting that person's number of shares, price and vesting. See Employee Stock Option Plan and Startup Equity Compensation.
Adopt the plan when you incorporate, in the same initial board consent that issues the founders' stock. Westaway's default is 10,000,000 authorized shares of common stock with 1,000,000 of them reserved for the plan. The stockholders, who at that point are just the founders, approve the plan too. Stockholder approval is what makes incentive stock options possible: under the tax code, an ISO must be granted under a plan that states the maximum number of shares it can issue and who is eligible, and that the stockholders approve within 12 months before or after the board adopts it. With both approvals done on day one, the first grant needs only a board consent.
Every grant of stock or options is a sale of securities, so it must either be registered with the SEC or fit an exemption. For private companies, the usual exemption is the SEC's Rule 701. It covers securities issued under a written compensatory plan or agreement to employees, directors, officers, and consultants and advisors, as long as the consultants and advisors are individuals who provide real services that aren't connected with raising money or promoting the company's securities. That last condition matters: someone who introduces you to investors in exchange for equity doesn't fit Rule 701.
Rule 701 has two numeric limits, both measured over any 12-month period. First, the total amount the company sells under the rule in 12 months can't exceed the greatest of $1,000,000, 15% of the company's total assets, or 15% of the outstanding securities of the class being granted. Options count on the date they're granted, at their exercise price, so a grant of 50,000 options at a $0.10 exercise price uses $5,000 of the limit. Second, once the company sells more than $10,000,000 under the rule in a 12-month period, it must give recipients enhanced disclosure, including risk factors and financial statements, a reasonable time before the sale, or for options, before they're exercised. Early-stage companies are usually well inside both limits, but the amounts climb as exercise prices rise after each round, so have your cap table platform track them. Shares issued under Rule 701 are restricted securities that recipients can't freely resell.
Size the pool to your hiring plan, not to a round number. Westaway's 1,000,000-share default is about 11% of the 9,000,000 fully diluted shares a typical company has right after formation, which covers the first several hires and advisors for most teams. Fully diluted shares are the issued and outstanding shares, plus the full option pool (both granted and unallocated), plus any warrants. SAFEs and convertible notes are never part of that count, because they aren't shares until they convert, and they shouldn't be shown as an ownership percentage on your current cap table. See Employee Option Pool and Authorized, Outstanding and Fully Diluted Shares.
A bigger pool isn't free. Unallocated shares count toward the pool investors will want at your first priced round, so an oversized pool simply moves founder dilution earlier. Build a hire-by-hire budget instead: each role you expect to fill before your next round and the grant you expect to offer. That total is the pool you need and the number you'll defend in a term sheet.
When the pool runs low, the board can add shares to it. Have the stockholders approve the increase too. For ISO purposes, an increase in the plan's maximum share number counts as adopting a new plan, which needs stockholder approval within 12 months before or after the increase for options granted from the new shares to qualify as ISOs. If the charter doesn't authorize enough shares for the increase, it has to be amended first, which also needs stockholder approval. See How Do I Increase My Startup's Authorized Shares?
Most companies add to the pool at their priced rounds, and that's where it costs the founders the most. Investors usually require that the unallocated pool equal a set percentage of the company after closing, and that any increase needed to get there be counted in the pre-money valuation. The new investors aren't diluted by that increase. The existing stockholders, mostly the founders, are. This is the option pool shuffle, and it lowers your effective valuation. The worked example below shows the numbers, and our Founder Guide: Series A and Option Pool Shuffle cover how to negotiate it. For new grants to employees who have vested most of theirs, see Equity Refresh Grants.
Early-stage companies use three kinds of awards: restricted stock, stock options and restricted stock units (RSUs). Which fits depends mainly on what the common stock is worth on the grant date.
| Restricted stock (RSAs) | Stock options | RSUs | |
|---|---|---|---|
| What the person gets | Actual shares now, subject to vesting and a company buyback right | The right to buy shares later at a fixed exercise price | A promise to deliver shares when the units vest and settle |
| What they pay | Fair market value when issued, paid up front | The exercise price, paid only if and when they exercise | Nothing |
| When it fits | Right after formation, while fair market value is near zero | Once the company has a 409A value above a nominal price | Usually later-stage private companies and public companies |
| 83(b) election | Available, within 30 days after the shares are issued | Not at grant; available for unvested shares received on early exercise | Not available |
| Who can receive it | Anyone eligible under the plan | ISOs: employees only. NSOs: anyone eligible | Anyone eligible under the plan |
Right after formation, the company's common stock is worth very little, so a first hire or advisor can buy restricted stock at fair market value for a nominal amount. If the board determines that fair market value is $0.00001 per share, 50,000 shares cost $0.50. The person owns the shares from the day they're issued, subject to vesting: if they leave early, the company can buy back the unvested shares, usually at the price paid. Because the shares are subject to vesting, the person can make an 83(b) election. See Restricted Stock (RSAs) in a Startup and Do Founders and Employees Have to Pay for Their Startup Stock?
That window closes as the company gains value. Once the company has raised money or the business has real value, buying stock at fair market value costs the recipient real money, and issuing it for less than fair market value generally gives the recipient taxable income. At that point, options take over. See Restricted Stock vs Stock Options.
A stock option is the right to buy a set number of shares at a fixed exercise price for a set period, which can't be longer than ten years for an ISO and is usually ten years for an NSO too. The recipient pays nothing until they exercise, which is why options are the standard award once the stock has a meaningful value. The exercise price must be at least the fair market value of the stock on the grant date, which is why you need a 409A valuation first. See Stock Options.
Some plans let holders exercise options before they vest, which is called early exercise. The shares received on an early exercise are unvested restricted stock, subject to the company's buyback right, and the 83(b) election becomes available for them. See Early Exercise Stock Options.
An RSU is a promise to deliver shares in the future. The recipient doesn't receive any property when the RSU is granted, so the 83(b) election isn't available, and the recipient is generally taxed on the value of the shares when the units settle. At a private company with no market for its stock, that can mean a tax bill with no way to sell shares to pay it. Private companies that use RSUs usually add a second settlement condition, a sale or an IPO, so the shares arrive when there's a way to sell them. Early on, restricted stock or options do the job more simply. See RSAs vs RSUs.
Stock options come in two federal tax types. Incentive stock options (ISOs) can receive more favorable tax treatment if the holder meets holding requirements, but the tax code limits who can get them and on what terms. Nonqualified stock options (NSOs) have no special requirements. Our rule is simple: ISOs to US employees, and NSOs to everyone else, including advisors, contractors, outside directors and team members outside the US.
The ISO rules are worth knowing, because a grant that breaks one of them is treated as an NSO:
How each type is taxed, including the alternative minimum tax issues ISOs can raise, is a question for each recipient and their tax advisor. See NSO vs ISO.
When someone receives stock that is subject to vesting, whether restricted stock or shares from an early exercise, federal tax law generally measures their income as the shares vest. Section 83(b) lets the recipient elect instead to have the shares measured when received, at their value then minus what was paid. The election must be made no later than 30 days after the shares are transferred. There's no extension, and once made, it can be revoked only with the IRS's consent. The recipient can file on IRS Form 15620, either online through the IRS website or by mail, using one method and not both. The election doesn't apply to options at grant or to RSUs.
Whether to file is the recipient's decision, made with their own tax advisor. The company's job is to tell every recipient about the election and the deadline on the day their shares are issued, and to keep a copy of whatever they file. See 83(b) Election.
Before the first option grant. A 409A valuation is an appraisal of the fair market value of the company's common stock, named for Section 409A of the tax code, which governs deferred compensation. An option is exempt from Section 409A only if its exercise price can never be less than the stock's fair market value on the grant date. An option that isn't exempt and doesn't comply can cost the holder dearly: income recognized early, plus an additional 20% tax and interest. Those consequences land on your employee.
The 409A regulations require a reasonable valuation method, reasonably applied. A value determined by an independent appraisal dated no more than 12 months before the grant is presumed reasonable, and the IRS can overcome that presumption only by showing the method or how it was applied was grossly unreasonable. The regulations also offer a narrower presumption for illiquid start-up stock valued in good faith by a qualified person. See 409A Valuation and How to Value Startup Stock.
Refresh the valuation at least every 12 months, because under the regulations a value calculated more than 12 months before it's used isn't reasonable. Refresh it sooner after a material event, because a value also stops being reasonable if it doesn't reflect information that becomes available later and may materially affect the company's value. A priced round, a major change in the business, a large customer won or lost, or an acquisition offer can each be that kind of event. Ordinary option grants aren't.
A SAFE round is a closer call. A SAFE doesn't set a price for common stock, but it puts new cash on the balance sheet, and the valuation caps investors agreed to are evidence of how outsiders see the company. An appraiser may treat a SAFE closing as information that materially affects value, especially after a large raise. Before you grant options after a SAFE round, ask your valuation provider whether your current 409A still holds. See Founder Guide: SAFE.
Under Delaware law, the board creates and issues stock options and sets their terms, including the number of shares, the exercise price and the timing. The board can delegate authority to grant options to an officer, but only within limits it sets in a resolution, including the maximum number of shares and the minimum price, and the officer can't grant options to themselves. Most early-stage boards simply approve grants by unanimous written consent. See Startup Board Consent.
The grant date is the date the board approves the grant, or a later date the approval specifies, and the exercise price must be at least the fair market value on that date under your current 409A. Don't backdate a grant to an earlier date with a lower price. Approve grants promptly, ideally on a regular schedule such as monthly, because the exercise price is fixed when the board acts, not when the offer letter was signed.
A promise isn't a grant. Until the board approves it and the paperwork is signed, the person has an offer, not equity, and an investor's diligence will treat an unapproved promise as a liability. See Promising Equity vs Issuing Equity.
The offer letter promises a specific number of shares, subject to board approval, and never a percentage. A percentage depends on the denominator, which changes with every grant and financing, so "1% of the company" invites a dispute later. A share count doesn't change.
A clean version reads something like this: "Subject to approval by the Company's Board of Directors, you will be granted an option to purchase 50,000 shares of the Company's common stock under the Company's equity incentive plan, at an exercise price equal to the fair market value of the common stock on the date of grant, vesting over four years with a one-year cliff." If a candidate wants to understand the percentage, tell them the number of outstanding and fully diluted shares as of a stated date so they can do the math themselves. See Use Exact Share Numbers, Not Percentages, for Equity Offers and Startup Equity Offer: Key Terms Employees Should Understand.
Four years of vesting with a one-year cliff is the norm for employees. Nothing vests during the first 12 months. At the one-year mark, 25% vests at once, and the rest vests monthly over the next three years. Vesting usually starts on the employee's start date, even if the board approves the grant a few weeks later. See Vesting Schedule and Unvested Shares.
Acceleration speeds up vesting when a specified event happens. Where employees have it at all, double-trigger acceleration is the common form: unvested equity vests only if the company is sold and the employee is then terminated without cause, or resigns for good reason, within a set period around the sale. Single-trigger acceleration, which vests equity on the sale alone, needs caution. It removes the buyer's retention tool, so buyers often respond by asking for new retention equity or a lower price for everyone, and investors often resist it. See Single Trigger vs Double Trigger Acceleration and What Happens to Stock Options When a Startup Is Acquired?
Say the company has Westaway's default setup: two founders holding 4,000,000 shares each and the 1,000,000-share pool. That's 8,000,000 issued shares plus the 1,000,000-share pool, or 9,000,000 fully diluted shares. The 1,000,000 unissued reserve doesn't count. The company hires its first engineer, Maya, and the board grants her an option to purchase 50,000 shares at the current 409A value of $0.10 per share, vesting over four years with a one-year cliff.
Her grant is 50,000 divided by 9,000,000, or about 0.56% of the fully diluted shares. It comes out of the pool, so the fully diluted count doesn't change: the pool now holds 50,000 granted options and 950,000 unallocated shares. Exercising all of it would cost her 50,000 times $0.10, or $5,000.
A year later the company raises a $2,000,000 seed round at an $8,000,000 pre-money valuation. With no change to the pool, the price per share is $8,000,000 divided by the 9,000,000 fully diluted shares, or about $0.8889. The investors receive $2,000,000 divided by that price, or 2,250,000 new shares, and the company now has 11,250,000 fully diluted shares. Maya's 50,000 options are now about 0.44% of the company, the investors own 20%, and every prior holder has been diluted by the same proportion: a smaller percentage of a company that should now be worth more.
Now suppose the term sheet requires that the unallocated pool equal 10% of the fully diluted shares after closing, with the increase counted in the pre-money valuation. The company must add 200,000 shares to the pool before the new money comes in. That raises the pre-money share count to 9,200,000, so the price per share falls to about $0.8696, and the investors receive 2,300,000 shares for their $2,000,000, still 20%. The company ends with 11,500,000 fully diluted shares, of which 1,150,000, or 10%, are unallocated pool. Maya's 50,000 options are now about 0.43%, and the 9,000,000 fully diluted shares that existed before the round are effectively valued at about $7,826,087 in total rather than $8,000,000.
| Before the round | Seed, no pool change | Seed, 10% pool top-up | |
|---|---|---|---|
| Fully diluted shares | 9,000,000 | 11,250,000 | 11,500,000 |
| Price per share in the round | none | about $0.8889 | about $0.8696 |
| Maya's 50,000 options | about 0.56% | about 0.44% | about 0.43% |
The seed price is the price of the investors' preferred stock. It isn't the value of Maya's common stock or her options, which the next 409A will set. If the company had SAFEs outstanding, they would convert in the seed round and dilute everyone further, but they weren't part of the fully diluted count before the round. See Equity Dilution and How Do SAFEs Convert in a Priced Round?
When an employee or advisor leaves, vesting stops on their last day of service. What happens next depends on the kind of equity they hold. See What Happens to Startup Stock and Options When You Leave the Company?
Unvested options are forfeited and go back into the pool, where they can be granted to someone else. Unvested restricted stock, including unvested shares from an early exercise, works differently, because the person already owns the shares. The company has the right to buy them back, usually at the price the person paid, within a window set in the stock purchase agreement. Calendar that window the day someone gives notice. The buyback usually takes a board approval, a written notice and payment, and if the window closes without action, the person may keep the shares.
Vested options can be exercised for a limited time after someone leaves, set in the plan and the grant agreement. A window of three months, often written as 90 days, is common, and it tracks the ISO rule: to keep ISO treatment, an ISO must be exercised within three months after employment ends, or within one year if the employee left because of disability. Some companies give longer windows, sometimes years. That's allowed, but an ISO exercised more than three months after employment ends is treated as an NSO for tax purposes. Extending the window on options someone already holds is treated as granting a new option for ISO purposes, with its own tax consequences, so get advice before you extend anyone's window. Options that aren't exercised by the end of the window expire and return to the pool.
Back to Maya. Suppose she leaves at month 20. She's past the cliff, so 20/48 of her grant has vested: 50,000 times 20/48 is 20,833.33, which the plan rounds down to 20,833 vested options. The other 29,167 options are forfeited and return to the pool. To exercise everything that vested, she'd pay 20,833 times $0.10, or $2,083.30, within the window. Whether she exercises, and how it's taxed, is her decision to make with her own advisor.
Shares a former employee keeps, whether vested restricted stock or stock bought on exercise, are usually still subject to the company's right of first refusal: before the holder sells or gives them away, the company gets the first chance to buy them on the same terms. That right usually sits in each founder's restricted stock purchase agreement and in the option and stock agreements under the plan, and some companies also put one in the bylaws. In a typical founder stock purchase agreement, the company has 30 days to decide whether to buy, and if it passes, the holder has 120 days from the notice to sell to the named buyer at the same or a higher price. See Right of First Refusal.
Leaving also means final pay on your state's schedule, returning company property and a reminder of the person's continuing CIIAA obligations. See What Do I Need to Do When an Employee Quits? and What Do I Need to Do When an Employee Is Fired?
Equity is the usual way to compensate an advisor. Put the relationship in a written advisor agreement before the advisor starts. It should say what the advisor will do and roughly how much time they'll give, how long the arrangement lasts and how either side can end it, and what equity they'll receive. It should also keep the company's information confidential and assign to the company any IP the advisor creates while advising, because an advisor who sketches your architecture or writes your first pricing model owns that work unless they sign it over. See Startup Advisor Agreement.
Advisors aren't employees, so they can't receive ISOs. While the company's fair market value is near zero, advisors usually buy restricted stock. Once the company has a 409A value, they receive NSOs. Either way, the grant goes through the equity plan with board approval, and Rule 701 covers it as long as the advisor is an individual providing real services not connected with raising money. Advisor grants are small, a fraction of a percent of the fully diluted shares for most advisors, and they tend to shrink as the company matures and its shares become more valuable. Size each grant to the time and value the advisor will actually contribute: an occasional call is worth less than a few hours a week of real work. Vesting is shorter than for employees, most commonly monthly over about two years, with no cliff or a short one, so the grant tracks the help the company actually gets. See Startup Advisor Compensation.
Two cautions. If an advisor works at a university, research institute or another company, their employer's policies may limit outside work or claim the IP they create, so ask before you sign. And don't pay anyone in equity to introduce you to investors. Equity for capital raising doesn't fit Rule 701 and raises its own securities law questions. See Co-Founder, Advisor, Employee or Contractor.
That's not your choice to make by label. Whether someone is an employee or an independent contractor depends on how they actually work, and calling them a contractor in an agreement doesn't settle it. Three sets of tests can apply to the same person. See Independent Contractor vs Employee.
The IRS common-law test decides federal employment taxes. It weighs behavioral control (does the company direct how the work is done?), financial control (who supplies tools, pays expenses and can make or lose money?) and the relationship itself (benefits, permanence, whether the work is central to the business).
The federal economic reality test decides minimum wage and overtime under the Fair Labor Standards Act. It asks whether the worker is economically dependent on the company or genuinely in business for themselves. The Department of Labor's rule on how to apply it is in flux: a 2024 rule weighs six factors with none given more weight in advance, though since May 2025 the Department hasn't applied it in its own investigations, and in February 2026 the Department proposed replacing it with a test that gives the most weight to the company's control over the work and the worker's opportunity for profit or loss. As of this writing, that proposal isn't final, though a final rule is expected soon, so check which rule applies when you classify someone.
State tests are often stricter. California's ABC test presumes that anyone paid to provide services is an employee unless the company proves all three of these: (A) the worker is free from the company's control and direction in doing the work, both under the contract and in fact; (B) the work is outside the usual course of the company's business; and (C) the worker is customarily engaged in an independently established trade or business of the same kind. Prong B is where startups get caught. A developer building your core product is doing work in the usual course of your business, however the contract describes them. Massachusetts and New Jersey also apply ABC tests for some purposes.
Getting it wrong is expensive. A misclassified worker can claim back wages and overtime, the company can owe unpaid payroll taxes and penalties, and state agencies can add their own assessments. It often surfaces when the worker files for unemployment or in an investor's diligence. As a working rule, a contractor fits a defined project done by someone with their own business, tools, schedule and other clients. Someone working full-time on your core product under your direction is usually an employee. See Should My Startup Hire Someone as an Employee or a Contractor? and How Do I Convert a Contractor to an Employee?
Your first employee makes the company an employer, with agreements and registrations to put in place before day one.
The offer letter states the title, start date, salary, whether the role is exempt or non-exempt from overtime, the equity offer as a number of shares subject to board approval, and benefits. It also says the employment is at will, meaning either side can end it at any time, for any lawful reason. Employment is at will by default in nearly every state, with Montana the notable exception, so make sure nothing else in the letter promises a fixed term or termination only for cause by accident. Make the offer contingent on signing the CIIAA and on proof of eligibility to work in the US. See Startup Employment Contract Guide and Exempt vs Non-Exempt Employees.
Every employee signs a Confidential Information and Invention Assignment Agreement (CIIAA) before starting. It keeps the company's information confidential and assigns to the company the inventions and work the employee creates in the course of the job, using present-tense language ("hereby assigns") so the assignment happens automatically. It also lists any prior inventions the employee is keeping. Some states, including California, bar requiring employees to assign inventions made on their own time without company equipment or information that don't relate to the company's business or result from their work for it, and California requires the agreement to give written notice of that limit. See CIIAA and What Agreements Should Startups Have With Their Employees?
Before the first paycheck, the company registers as an employer with the tax and unemployment insurance agencies of the state where the employee works, collects a Form W-4, withholds federal and state income tax and the employee's share of Social Security and Medicare taxes, and pays the employer's share along with federal and state unemployment taxes. States also require employers to report new hires. A payroll provider handles most of this, but the company stays responsible. Most states also require workers' compensation insurance once you have employees, some only above a minimum headcount.
Every new employee completes Section 1 of Form I-9 by their first day of work, and the company examines their identity and work authorization documents and completes Section 2 within three business days after they start.
If the employee works in a different state from your headquarters, all of this happens under that state's rules, and the company may also need to register to do business there. See How Do I Hire Remote Employees in Other States?, Employee Onboarding for Startups and What Should Founders Know About Startup Employment Law?
We don't recommend non-competes for employees. California voids them, a growing list of states limit them by income or type of worker, and courts elsewhere enforce only narrow ones. The Federal Trade Commission's 2024 rule banning most non-competes was set aside by a federal court, and the FTC abandoned it in 2025, so the rules remain state by state.
Use tools that work instead. The CIIAA protects confidential information and makes sure the company owns what employees build. Trade secret law protects confidential information whether or not anyone signed a non-compete. And a narrow non-solicit can stop a departing employee from poaching your people or customers for a limited time where state law allows it. State limits apply here too: California courts generally won't enforce customer non-solicits and have refused to enforce employee non-solicits in key cases. See Non-Compete Clauses and Non-Solicitation Clauses.
Employees must be paid at least the minimum wage, and overtime if they're non-exempt, and federal rules require those wages to be paid in cash or a negotiable instrument such as a check. Stock and options don't count toward the minimum, and an employee can't waive the right by agreeing to work for equity. An early team member who works full-time for "sweat equity" alone is a wage claim waiting to happen. Once the legal minimum is paid in cash, you can add as much equity as you like. Unpaid interns at a for-profit company are allowed only in narrow circumstances. See Can Startup Workers Be Paid Only in Equity?, How Much Should I Pay My First Startup Employees? and Can My Startup Have Unpaid Interns?
Founders who are also officers are a different case. Federal wage rules include an exemption for an employee who owns at least a bona fide 20% equity interest in the business and is actively engaged in managing it, with no salary requirement, which can cover founders who work without pay. State law can differ, and not every founder fits, for example one of five co-founders with less than 20% each. Check how the rules apply to your team, and document any founder salary decision with a board approval rather than letting unpaid salary accrue.
Put every contractor relationship in a written agreement signed before work starts. It should define the scope of work and the deliverables, the fees and payment terms, the contractor's status as an independent business responsible for their own taxes and tools, confidentiality, and a present assignment to the company of everything the contractor creates for it. See Startup Contractor Agreement.
The IP assignment is the clause that matters most. Copyright in work an independent contractor creates belongs to the contractor unless they sign a written transfer. Calling it "work made for hire" doesn't solve the problem on its own: for a contractor, that label works only for a short list of categories of commissioned works, and software isn't one of them. In California, a contract with an individual that says the work is "made for hire" can also make that person an employee for workers' compensation and unemployment insurance purposes, so contractor agreements there should rely on an assignment. Get signed assignments now from anyone who has already built something for you. See Who Owns Startup IP?
A contractor can receive equity, but it goes through the equity plan like any other grant, with board approval, as NSOs or restricted stock, never ISOs. Rule 701 covers grants to individuals providing real services. If your contractor is a company rather than an individual, Rule 701 doesn't cover a grant to it, so talk to your lawyer about another route before you promise equity. And a contractor paid in equity who works full-time under your direction may be an employee owed minimum wage in cash.
You have three main options. You can engage the person as an independent contractor with a full IP assignment, which is simple but carries misclassification risk under local law if they work like an employee. You can use an employer of record, a local company that employs them on paper and runs payroll, benefits and compliance while you direct their work; check that its agreements pass the IP the person creates through to you. Or, once you have several people in one country, you can set up a local subsidiary.
Equity for people outside the US goes through the plan as NSOs. Local tax and securities rules decide how the grant is treated and what paperwork it needs, so check them before the first grant in each new country. See How Do I Hire Someone Outside the US?
Founders promise "1% of the company" in an offer letter, or promise equity over email and never get board approval, so the hire believes they own something the cap table doesn't show. They grant options before getting a 409A, use one that's more than a year old or stale after a financing, or backdate a grant to an earlier, lower price. They grant ISOs to advisors and contractors, who can only receive NSOs, or add shares to the pool without stockholder approval and lose ISO status for the new grants. They let the buyback window on a departing employee's unvested shares lapse. They classify a full-time product engineer as a contractor, skip the IP assignment from the freelancer who built the prototype, or ask employees to sign non-competes that won't hold up. And they let early team members work for equity alone.
Each of these is cheap to prevent and expensive to fix, usually in the middle of a financing. If you've already made one, our Founder Guide: Avoid 10 Rookie Legal Startup Mistakes walks through the fixes. See also Startup Compensation Mistakes to Avoid.
If you haven't formed your company yet, or want to check your founder stock and vesting, start with our Founder Guide: Incorporating Your Startup. For more on early grants, see Startup Employee Equity: How to Grant It to Early Hires, and for employment questions, What Should Founders Know About Startup Employment Law? When you're ready to raise, our Founder Guide: SAFE covers your first outside money, and our Founder Guide: Seed Funding and Founder Guide: Series A cover how the option pool is negotiated in priced rounds.
This guide is education, not legal or tax advice. Westaway has helped founders grant equity and hire their first teams since 2008. If you'd like help setting up your equity plan, making your first grants or hiring your first employees, contact us. We're rooting for you.
