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What are some must have's in an employee contract that is equity only?

We've just hired a developer and since we didn't have capital we've given him equity in the company. I know sometimes this is frowned upon but it was our only option and we're happy about it.

That said, it's contract time. What are some things that must be included in the contract that will save us in the long run.


17 Replies

Eric Wold
4
0
Eric Wold Entrepreneur
CEO @ RingSeven • Web & Mobile Dev • Startups
Others will contribute so I'll just mention one important point I've seen people accidentally leave out before... does the developer understand he/she doesn't have independent rights to use what is developed on the side?

I've seen things go south for "no fault" reasons (like funding trouble) and a developer leaving, and starting a competing venture feeling they own the code individually because they were never "paid" for it.
Doug Bend
2
0
Doug Bend Advisor
Legal Counsel For Entrepreneurs @DougBend • Real Estate Broker @BLGProperties • Co-Founder @AgentFound
It is very difficult to find the right developer for your business. They not only have to have a solid work ethic and the skill set your company needs, but their chemistry has to mix well with the rest of your team. Instead of giving the developer all of their shares at once, consider having their shares vest over time so you have a fair solution if these factors do not line up as well as you expect, which is often the case.
Annie Webber
0
0
Annie Webber Entrepreneur
Founder and CEO at Legal Hero
Eric and Doug definitely made some good points. Many contracts for these types of arrangements include provisions that (1) ensure that the company owns the code developed; (2) provide for vesting over time; (3) give the company and other shareholders other important rights like stock repurchase rights and rights of first refusal. I know this developer isn't quite a co-founder, but our post on structuring equity among co-founders might be helpful as you consider what provisions to include in the contract:http://blog.legalhero.com/splitting-co-founder-equity-part-2-structuring-considerations
Jacob Kojfman
0
0
Jacob Kojfman Entrepreneur • Advisor
Experienced technology and corporate lawyer, focusing on SAAS
1. Rights to buyback the shares if he leaves
2. Shareholder agreement
3. Assignment of any IP and rights into the IP
4. Employment agreement/co-founder agreement
Andrew F. Martz
1
0
Andrew F. Martz Entrepreneur
Andrew F. Martz: Ideation, Strategic, Maximizer, Futuristic, Self-Assurance
You can rightfully consider me biased, but in my humble opinion, one essential thing you need in this case is a business lawyer to help you establish an agreement with your developer, draft your contractual language, and organize your equity plan. Yes, you can do it yourself. Yes, the crowd has wisdom. Yes, there are online tools to help you. But, who are you going to call when there is an issue? You might as well establish a relationship early, and enjoy the benefits and peace of mind that comes with being represented. If building your product is an important and valuable thing to you, isn't building your company important and valuable also?

As the old saying goes: Garbage in, garbage out. Start well, and aim to succeed. There are a number of attorneys and law firms that will help you at a very low cost, possibly even for equity.

Good luck, and fare thee well, on your heroic journey. I wish you every success!
Andrew F. Martz
1
0
Andrew F. Martz Entrepreneur
Andrew F. Martz: Ideation, Strategic, Maximizer, Futuristic, Self-Assurance
You can rightfully consider me biased, but in my humble opinion, one essential thing you need in this case is a business lawyer to help you establish an agreement with your developer, draft your contractual language, and organize your equity plan. Yes, you can do it yourself. Yes, the crowd has wisdom. Yes, there are online tools to help you. But, who are you going to call when there is an issue? You might as well establish a relationship early, and enjoy the benefits and peace of mind that comes with being represented. If building your product is an important and valuable thing to you, isn't building your company important and valuable also?

As the old saying goes: Garbage in, garbage out. Start well, and aim to succeed. There are a number of attorneys and law firms that will help you at a very low cost, possibly even for equity.

Good luck, and fare thee well, on your heroic journey. I wish you every success!
Robert Tolmach
1
0
Robert Tolmach Entrepreneur
Entrepreneur and Social Entrepreneur
Vesting! You can read lots about cliffs and vestings on quora.com.
Ben Sweat
1
0
Ben Sweat Entrepreneur
Director, Product at Idealab
I would make sure there was a vesting schedule for starters. Non-Compete. NDA. Ownership of their work. But you'd probably want an attorney's opinion.
Marc Pariser
0
0
Marc Pariser Advisor
CEO/Founder at ShowBizCentral, Inc.
Zack, This may be obvious, but I'll say it anyway. Do not vest all the equity immediately. This should be a performance based arrangement with chunks of equity vesting as certain milestones are reached. There should be clear deliverables and delivery timeframes, consequences if those milestones are not reached, the right to fire the developer if you're not satisfied, etc. Developers have a tendency to promise a lot, and just as often are not capable of delivering. Marc
Rob Gropper
1
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Zack, by now you should be seeing a pattern. if not here goes:

1. IP assignment clause. non-negotiable. the company must own the IP and unless you have an explicit IP assignment clause the company does not own the code/IP even if you pay him/her.
2. NDA - you just want to be sure everyone understands that you take your important business info seriously so s/he should too. if S/he quits and joins your biggest competitor you want grounds to take action if need be.
3. vesting
4. letter of understanding. I'm no attorney, but i've spent a lot of time working with them. I recommend that you hire an attorney TO REVIEW and FINALIZE the things you think are important, but draft them all yourself so you understand them. You can start with standard agreements from a number legalzoom-like sites. Too much legalese can get in the way of understanding and/or reaching agreement. I like to write up a letter of understanding that says in plain english what your expectations are and what you've discussed and when you discussed it and with whom. The attorney may or may not want to include it as an exhibit to the agreement.
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