Avoiding Employment Law Missteps: Tips for Early-Stage Startup Founders
Time is a startup founder's most precious commodity. While administrative tasks are unavoidable, founders must maintain their focus on building and selling the product. One area where founders often struggle to find the right balance is managing legal and compliance issues related to employees.
This post offers practical tips to help early-stage founders navigate these issues in an efficient manner.
The Two Non-Negotiables
Pay people correctly and on time. There’s no margin for error here. Hiring is a commitment, and incorrect and late paychecks have tax and legal consequences. Did you know that a company can face a class action in California simply because employee paystubs have incorrect or incomplete information on them? In California, business owners can even be personally liable for unpaid wages. There are great companies like Central that can take this issue off your plate. Outsource to them as soon as you start hiring and prioritize getting them what they need to do their job.
Do not let employees or contractors start work until they sign a CIAA. A Confidentiality & Inventions Assignment Agreement (“CIAA”) ensures that the company owns all intellectual property rights in an employee’s and contractor’s work product. A standard due diligence item is to demonstrate that you have one for all former and current employees and contractors. The last thing you want is to find out in the middle of a funding round is that a former engineer who did key work never signed one. At that point, you have no leverage to make the person sign and, if they don’t sign, are at the mercy of your investor. You can avoid this by recognizing that CIAAs are not routine paperwork, but rather are a foundational document of your business and you need to make sure no one - including founders - starts work until they sign one. Law firms like Orrick and Cooley also have great templates that are off the shelf. Just make sure to have your own attorney review.
Getting From 0 to 1
Have a handbook and follow your policies. Life happens to your employees. Their family members get sick. They start families. They want to take vacation. An employee with a disability will need an accommodation. When things like this come up, your employees will come to you wanting to know what to do. If you have an employee handbook, you will have the answer. If you don’t have a handbook, you’ll find yourself having to develop HR policies on the fly, which is both unfair to your staff and a waste of your time. Services like SHRM and CalChamber provide off the shelf handbooks that take minimal time to set up and check all the legal boxes. Take the time to create one, and have an attorney review it and keep it up to date with changes in law. If you need help in a specific situation, you can go back to that attorney for tailored advice.
Focus on Fairness. Legal claims for discrimination are, at their core, rooted in allegations of unfair and inconsistent treatment of employees. You can avoid many of these claims by consistently asking yourself whether employees will perceive you as being fair. Here are the types of question you should be asking: Are men and women at the same level receiving comparable salaries and equity grants? Are you tolerating mediocre performance in some employees while holding others to a higher standard? Is an executive’s harsh approach driving results or are they really just demoralizing your best employees? Your focus is understandably the company, but remember your staff is taking cues from your every move. If your staff views you as fair (and fair does not mean nice) you will head off many legal issues that could manifest.
Medium Term
Bring in fractional help. If your company grows into a billion-dollar juggernaut, you’ll likely hire a full HR team. Between incorporation and IPO however, it can be difficult to know when to invest in infrastructure. A good first step is to hire in a solid fractional human resources provider when you find employment issues are starting to consume the time of company leaders. These companies cover the gaps that technology can’t, while not requiring additional headcount or eating into your equity pool. Please contact me if you’d ever like a referral!
Conclusion
The above is not a full HR roadmap, but does provide some foundational advice to help you avoid an expensive and time-consuming legal misstep. Good luck!
*This blog is intended to provide a general summary of best practices and does not constitute legal advice. You should consult with counsel to determine the exact legal requirements in a given situation.