Startup Evolution / A Year-Long Journey through A Founder’s Toolkit: Building Your Dream Team - Legal Considerations for Your First 10 Hires

These early hires will define your company culture, drive innovation and help establish credibility with investors. Equally important, however, is ensuring that you handle the legal aspects of these hires correctly from the start. In this article, we will examine the key legal pitfalls and best practices around building your initial team.

1. Why the First 10 Hires Matter—Legally and Strategically

Your initial hires are not just filling job titles; they are fundamental stakeholders in the future of your company. The decisions you make now—both strategically and legally—can significantly influence:

• Company Culture: Early employees set the behavioral norms and work ethic that will define your startup for years.
• Investor Confidence: Savvy investors often request employment documentation, equity grant details, and confidentiality agreements during due diligence.
• Operational Efficiency: A legally compliant HR framework allows you to scale without constantly revisiting or fixing foundational processes.

Missteps—like misclassifying workers or offering poorly documented equity—can expose your startup to lawsuits, tax liabilities or founder disputes down the line

2. Employment Classification: Getting It Right from the Start

One of the most common and costly mistakes for new startups is worker misclassification:

• Employee vs. Independent Contractor
  • Employees are subject to tax withholdings, must receive W-2s in the U.S., and are generally protected by labor and employment laws (wage-hour regulations, anti-discrimination statutes, etc.).
  • Independent Contractors often set their own hours, provide their own tools and invoice you for services. They usually do not get benefits or require tax withholding.

Getting this distinction wrong can lead to significant back taxes, penalties and legal disputes. If you direct someone’s day-to-day tasks, schedule and methods, they likely qualify as an employee—regardless of what your contract states.

• Full-Time, Part-Time or Temp
  Within the realm of employees, you must also designate whether a worker is full-time or part-time, and whether they qualify for overtime pay under relevant labor laws. Having robust job descriptions and clear offer letters goes a long way toward staying compliant.

3. Offer Letters, Employment Agreements and At-Will Disclaimers

For your first 10 hires, documentation is king. Even if you are hiring friends or former colleagues, put everything in writing:

• Offer Letters
  • Compensation: State base salary (or hourly rate), bonuses or commissions clearly.
  • Position & Reporting: Outline the job title, responsibilities and who they will report to.
  • Contingencies: Reserve the right to run background checks, confirm references or complete other verifications.
• Employment Agreements
  • Confidentiality and IP Assignment: Your agreement should clearly state that any intellectual property created on the job belongs to the company. This point often becomes a key investor requirement.
  • Restrictive Covenants (Where Enforceable): Non-compete and non-solicitation clauses vary in enforceability by jurisdiction. Check local laws to avoid invalid or overly broad clauses.
  • At-Will Employment: In most U.S. states, you can terminate an employment relationship at any time, for almost any lawful reason (and vice versa). Including an at-will disclaimer in your agreements can shield you from wrongful termination claims—provided you are not violating anti-discrimination or retaliation laws.

4. Equity, Vesting and Cap Table Clarity

Offering equity is a powerful way to attract top talent when you cannot match big-company salaries. Yet, many startups fail to properly document these grants:

• Equity Allocation
  • Decide how much equity to reserve in an option pool for early employees. Document this in your cap table and corporate records so you do not inadvertently promise more shares than you have available.
  • Differentiate between Restricted Stock (often used for very early hires) and Stock Options (common for broader employee pools).
• Vesting Schedules
  • A four-year vesting schedule with a one-year cliff is standard. This means no equity vests if the employee leaves before one year, after which vesting typically happens monthly or quarterly.
  • Be explicit about what happens if the company is acquired (acceleration clauses) or if the employee resigns or is terminated for cause.
• Cap Table Management
  • Update your cap table every time you issue or change equity grants. A messy cap table can scare off investors and lead to disputes.
  • Consider using specialized software to track vesting and keep records consistent.

5. Protecting Confidential Information and Trade Secrets

In a fast-paced startup environment, employees will have access to sensitive data like source code, client lists or marketing plans. To safeguard this information:

• Confidentiality Agreements: Require employees to sign NDAs as part of the onboarding package. Clearly define what is considered confidential and the consequences of disclosure.
• Data Security Protocols: Implement role-based access and encryption for critical files. Even a small startup should have basic cybersecurity measures to prevent unauthorized leaks.
• Termination Procedures: Revoke access to all company systems immediately if an employee departs. Remind them of any continuing obligations under their NDA or employment agreement.

6. Avoiding Common Pitfalls

• Verbal Promises of Equity
  Nothing leads to legal entanglements faster than an undocumented promise of ownership. Keep all equity matters in written, signed agreements.
• Ignoring Local and Federal Regulations
  Make sure you’re on top of employment laws—this includes minimum wage, overtime, paid leave, or visa requirements (if hiring international talent).
• Neglecting Onboarding & Offboarding
  Even a short onboarding checklist helps standardize the process from signing NDAs to setting up payroll deductions. Similarly, have a clear offboarding process, especially concerning the return of company property and revocation of digital access.

Conclusion & Call to Action

Your first 10 hires form the core of your startup—both culturally and legally. By properly classifying workers, documenting compensation and equity arrangements, and adhering to local employment regulations, you build a stable foundation that can scale smoothly. Overlooking these legal essentials can lead to disputes, financial penalties or worse at a time when your business can least afford it.

Stay tuned for next month’s deep dive on early-stage funding—whether you decide to bootstrap, engage angel investors or explore other financing options. In the meantime, if you have questions about employment agreements, equity plans or compliance best practices, reach out to us. We are ready to help you keep evolving your startup, one well-informed decision at a time.

Author Jason Acevedo is a partner in the Venture Capital & Emerging Growth practice group in the Corporate and Securities Department at Klehr Harrison.

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