How to Onboard Your FIRST Employees to Your Startup | Cooley LLP Partner, Sally Kay J.D.

The other place that you're gonna really get in trouble, and so this is really what we're gonna focus on, is when you bring other people in. And I would say that in 16 years, I've seen 10 of my clients have to shut the company down because they screwed something up here. And this is not hard stuff. This is easy stuff. It's just a matter of kind of following formalities. But if you don't follow the formalities, People can become unhappy, and then people can go get lawyers. And, you know, there are nice lawyers like me. There are lots of people in my profession who will take on any kind of claim for any kind of reason at any kind of time if they think that they can get money. And so if you're— on the flip side, you're working at a company and you feel like somebody's done you wrong, they fire you, you will be able to go find a lawyer. You might not be a good lawyer, but you will find a lawyer who will go make the company's life extremely miserable, bringing a claim, an employment-based claim of some sort, or compensation-based claim of some sort, that could potentially deplete the company of all its money. And like I said, I've had companies that have had to shut down because they've been in the middle of litigation over employment matters, or matters with contractors, where the fees were potentially going to be so high and the company didn't have any money, and then nobody wanted to invest because they had this lawsuit pending. And just shut it down. And that's pretty heartbreaking, especially because the founder is then kicking themselves saying, I could have avoided this if I would have done what I was supposed to do up front. So we're going to talk about the kind of things that will most often get you into trouble here. And I have a— I'll give you, before you guys leave, I have a handout too, which is the latest law on distinguishing between employees and contractors. Okay. So we talked about when people start work, how it is critically, critically important for them to sign something when they start. For employees, basic form of offer letter. Company XYZ is delighted to offer you the position of marketing specialist. Your annual salary will be, you know, the minimum in California, $37,440 a year for salespeople. That's a lot of money. Salaried employees. Minimum wage depends on your county, but minimum wage. Your hours of work will be Monday through Friday from 8 to 4. You will report to the marketing vice president. We will issue you a laptop, blah, blah, blah, blah, blah. You need to provide us proof that you are able to work legally in the United States, and you need to sign a confidentiality agreement. Standard letter, 2 pages long. It's not an employment contract. It's just an offer letter. Yes? What was the amount of money? I think it's $37,440. It's a lot of money when you have no money. It's a lot of money when you have no money. But it is not a guarantee of employment. It's just an offer letter. Most employees in California, most employees in the United States, are at-will, which means that they— you can fire them for any reason or no reason. They can quit for any reason or no reason. That's at-will employment in the state of California. Contractors, you do something different, but you're going to sign some kind of agreement with the contractor because you want to make sure that you've got a piece of paper that sets forth what you— what the work is that you're asking them to do, how much you're going to pay them, Whether that is in stock or it is in equity, or if they agree that they're not taking any payment. And like I said earlier, the assignment that all the work that they do belongs to the company. I have a client, former client. She had contractors that were doing— they're developing the UI for their site. She had a signed agreement with them to do 25 hours of the work And she agreed to pay them $6,000. That part was fine. But then she wanted them to do Part B. And there was some back and forth about what Part B consisted of. There was some back and forth emails about how much Part B was— how much money they were going to get paid for Part B. They went back and forth and back and forth. And they were doing the work, but they were still back and forth and back and forth over how much she was going to pay for it and what the work actually was and what the deliverable was. And they signed nothing over this Part B. So founder, not a very nice woman, very snippy. Tone of her email starts getting nastier and nastier. They're saying, guess what? You haven't paid us. We're not giving you the work we did because you haven't paid us. And by the way, we spent 500 hours on it and you owe us $75,000. Well, I never authorized you to do that. Well, you never not authorized me to do this, because here's your 50 emails saying, when's this going to be done, and why didn't you do this? Back and forth, back and forth. 400 emails. The only reason I know there's 400 emails is because they went and got a lawyer, and they sued her for nonpayment. She countersued them. I don't know why her board let her do that, because they didn't have a lot of money, saying that they never delivered the thing they were suing on. It went back and forth. Long enough, company went through all of its money. Investors said, we're not giving you any more money, so either figure this out or we're done. And we bankrupted the company. Now, to make it worse, in the process, this founder, she got fired. They promoted somebody else within the company to be the CEO. In the bankruptcy, she had to sign certain documents that made her the responsible party for things related to the company. We shut everything down, the board resigned. Well, the lawyers for the contractors didn't like the bankruptcy, and so then they went after her personally because she was the responsible party. And it's still going on. It's been 6 years and it's not over yet. And this poor woman who's now tried to get on with her life, she's got a different job, she's got 2 kids, she's got a husband who's not very happy that she took the promotion in that company. It's still going on. And there really is— we actually offered to give them the company. In settlement before we declare bankruptcy. He said, fine, the company's worth about $75 grand at this point. Here, we'll just give you the company. We think you're hiding money. They went through the whole bankruptcy process. We think you're hiding money. And as ridiculous as those claims were, there's still a lawyer that was out there pushing. And it's about ready to be done, I think. And after all this money that these people have probably paid their lawyer, unless he took it on contingency, they got about $9,000. That's what they got from the bankruptcy court because that was about all that was left. And a lot of people lost their jobs. I didn't get paid either. So it was, it was all very unfortunate all the way around. But it could have been avoided. She would have signed an agreement. It wasn't hard. It was really not hard. So think about that. I know you're so enthusiastic. You want to get going. You want people to start doing work right away, right? Oh my God, I met this guy. He's the smartest guy. He's the best programmer in the whole world. He is going to draft this. He's going to Write code for me, I'm gonna have a thing up and running, I just want him to get going. Don't wanna spend time fighting over some language in a contract. You just get started, dude, and we'll figure it out later. Try, try, try not to ever do that. Sign something first. So, compensation arrangements, ownership equity. It's the promises you get into. Does that make sense? So nobody's gonna let people start doing work for them until they sign something that says that the work comes to the company and there's no ambiguity over what they're gonna get paid. Okay. This is a big, big, big problem. Employees versus contractors. So have any of you been funded? Nobody's funded yet. All right. So it's really hard to pay people when you don't have any money, right? Huh? Hard. It's hard to pay people when you got no money. And so maybe your parents are really cool and they said, okay, well, we'll lend you 10 grand so that you can get some stuff done. But there's a lot of really important things that you want to do with your money. But in California, if you have an employee, there's a minimum amount of money that you have to pay somebody as an employee. And you need to withhold for taxes, and you need to provide— you don't necessarily need to provide benefits, but you do need to subtract for Social Security and all those things. So lots of companies say, oh, I know how we can get around this problem of paying people. We'll just call them contractors. Well? It doesn't really work that way, because you can't just call somebody a contractor so that you don't have to pay them. There's a lot of very well-established law, and like I said, I have a handout that will detail the latest ruling of the Labor Commission, that explains why you can't just call somebody a contractor. They really do look very carefully and are starting to audit companies a little more heavily to really see what the real deal is. Is this person really a contractor, or are they an employee? Because you can't just do it to get around it. And if you have misclassified somebody, and you've said all along, this person is a contractor, they're a contractor, they're a contractor, I don't have to pay them. I can just pay them in stock. I don't have to give them any cash. And then the Labor Board comes back and says, actually, they're not. They are an employee. The penalties are really, really severe. And we actually have a client who— 900 contractors got reclassified as employees. And it's taken the company 3 years to implement this program. They had to work through it. It was very, very expensive. And it was also very expensive for those individuals because all of a sudden then those individuals also had some tax consequences that they had to deal with. The big thing that things turn on here, how key is the work to the core of what the company does? Right? So you've got a guy, he's doing all of your software development. All of your software development. Nobody else is developing software except the one guy. Is he really a contractor? Well, it depends. It depends on what he's doing. Are you— is he working— are you making him come to your place to do the work? Or is he working from his own home or his own office? Are you telling him he needs to work on your stuff from 8 to 5 every day? Or can he just get it done as long as he gets it done by some end date certain? Do you require him to check in every day? Are you standing over his shoulder supervising him constantly? Or is he really a contractor? Does he have his own business where he has more than one client? Oftentimes he can show a pattern that he is a con— he really is a contractor. I have contract services. I hold myself out to other people and I do work for this company and this company and this company. In the past, I've worked for these 9 companies and I got 1099s from all these companies to show it. But if you— it's really somebody who's coming to your office every day, sitting next to you, you're watching what they're doing, and they're really core to what it is that you're trying to accomplish, they're not a contractor, and they would be deemed an employee by the government. So really, really careful. Be really, really careful, because it's really, really expensive. Same problem with interns and volunteers. Interns, I don't know if any of you did internships when you were students, but usually when you do an unpaid internship, You aren't producing much, right? You're just kind of there because you're supposed to be learning something from the people who have provided you the internship. So you may be helping along on a project, you may be shadowing some people, but they're not really reliant on the work that you're producing as an intern. So I have a client, we just had this conversation today, he goes, oh, I hired 5, I have 5 interns here this summer. And I said, what do they do? And he said, this, that, and the other. And I'm like, but nobody in your company is doing that except those 5 people. Yeah. Well, who's supervising them? Oh no, they're just doing it on their own. That's not an internship. That's slave labor from some kids from the community college down the street. It doesn't really work that way, right? Same thing with volunteers. People don't generally volunteer to just come. If it's your mom, sure. You can have your mom do some stuff, some envelopes, do some marketing, put together some pretty graphics for your business cards, fine. But generally, you do not have people volunteering in your business.