Hiring a Developer or Consultant
Are you hiring a developer, other employee or consultant for your company? Here are some of the key legal considerations we will discuss with you:
- Offer Letter: Do you have an appropriate form of offer letter for an employee or consulting agreement for an independent contractor? Does the offer letter specify at-will employment? Are any stock options described using the correct language, including board approval, exercise price and vesting? In general, it is preferable to quantify stock options and other equity awards by referring to a specific number of shares, rather than a percentage of the company, because everyone’s percentage can change with every new issuance (or cancellation) of shares or options to employees or investors. A percentage is a useful snapshot in time but won’t usually remain constant.
- Confidential Information and Invention Assignment: For any employee or consultant, particularly a developer or other person involved in the creation of products or services, it is critical for the employee or consultant to sign the appropriate agreement protecting the company’s confidential information and assigning to the company all intellectual property rights in work product. Do you have the two different forms of agreement you’ll need for employees and for independent contractors? Do the agreements meet the specific requirements of California law? How do you proceed if you have not yet incorporated or if the developer may not be paid until the company is funded?
- Past Employers and Nondisclosure Agreements: Has the employee or consultant performed similar work for another company in the past? Do you have copies of the nondisclosure agreements (NDAs) signed with the previous companies? Do you understand the scope of the employee or consultant’s earlier work? Does everyone understand the importance of not incorporating any previously assigned intellectual property into the products or services of the company?
- Employee Versus Independent Contractor: Each person working for the company must be classified for tax purposes as either an employee (paid Form W-2 wages) or an independent contractor (paid Form 1099 fees). Courts and the IRS have developed a long list of factors to use when determining the appropriate classification. Do you understand the legal, tax and practical differences between the classifications and the penalties associated with improper classification of personnel as independent contractors?
- Reporting and Withholding: Are you familiar with the various state and federal reporting requirements for employees and for independent contractors? Do you understand the requirement to withhold and remit payroll taxes for employees and the penalties for not doing so?
- Minimum Wage Requirements: State and federal minimum wage requirements apply to all businesses, including startups. Can you “pay” an employee in equity if you have not yet obtained funding?
- Work Authorization: Is the employee or consultant authorized to work in the United States? Do you understand your obligations to verify work authorization and to complete Form I-9?
- Noncompete and Nonsolicitation Agreements: California law generally prohibits employers from requiring employees to sign an agreement not to work for a competitor following termination of employment. You should not include a noncompetition covenant in an agreement with a California employee without consulting legal counsel. What kind of restrictions on soliciting customers, other employees and consultants can be included in California?