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Navigating Startup Funding: The Venture Capital Question
We want to share important considerations regarding funding options for emerging businesses, particularly focusing on venture capital as a potential path. Despite its prominent coverage in business media, venture capital may not be suitable for every entrepreneurial venture.
Unvested Shares Demystified: Understanding Equity Compensation in Startups
When a company grants stock, it doesn’t mean employees immediately own it outright. Instead, the equity is tied to a vesting schedule - a structured process that gradually transfers ownership over time. Unvested shares are those that an employee has been granted but are still subject to the company’s right to repurchase if the employee leaves early.
Understanding Acceleration: Protecting Startup Talent Through Vesting Strategies
Acceleration is a mechanism in equity compensation that allows employees or founders to vest their stock options faster than the original schedule. It is most often triggered by significant events like a company acquisition. Acceleration ensures that key contributors are fairly compensated during major transitions and protects the value of their equity.
Vesting Schedules: The Strategic Foundation of Startup Equity Compensation
For both founders and employees, vesting schedules are more than a technical requirement. They are a strategic tool that determines how equity is earned, how long employees remain motivated, and how well a startup protects its ownership structure. A well-designed vesting schedule can strengthen retention, build loyalty, and align incentives between the company and its team.
FAQs
Open allHow long should a non-solicit last?
A typical duration is 12–18 months. Longer restrictions are more likely to be challenged in court.
Are non-solicitation clauses enforceable in every state?
Not always. Most states allow them if reasonable, but California restricts employee-related non-solicits. Customer-focused non-solicits may still be enforceable in certain cases.
Should founders include non-competes in all offer letters?
No. Non-competes should be used cautiously, only in states where they’re enforceable and for roles where they are truly necessary. Otherwise, focus on enforceable alternatives.
Do startups need non-competes to protect intellectual property?
Not necessarily. Strong confidentiality and invention assignment agreements often provide more reliable protection for IP and trade secrets.
What’s the difference between a non-compete and a non-solicitation clause?
A non-compete restricts where someone can work, while a non-solicitation clause only prevents them from taking your clients or employees. The latter is generally easier to enforce.
Are non-compete clauses legal in all states?
No. Some states, like California, ban them outright. Others only enforce them if they’re narrow and justified by a legitimate business interest.
Should startups use templates for employment and contractor agreements?
Templates are a good starting point but rarely cover the specific needs of your business. Customized agreements reduce risk and ensure compliance with state and federal laws.
What happens if I misclassify a worker?
You may face IRS penalties, back taxes, unpaid benefits, wage claims, and potential lawsuits. States like California impose strict penalties for misclassification.
Do contractors get the same benefits as employees?
No. Independent contractors are responsible for their own benefits, insurance, and tax obligations unless you choose to offer additional perks in the contract.
Can I decide whether someone is an employee or contractor?
Not entirely. The classification depends on how the work is structured. If you control when, how, and where they work, they’re likely an employee, even if the agreement calls them a contractor.
What makes a severance agreement enforceable?
It must be clearly written, voluntary, and compliant with state and federal laws. Agreements with older workers have additional requirements under the Older Workers Benefit Protection Act.
Do employees have to sign a severance agreement?
No. The agreement must be voluntary. If an employee refuses to sign, they may not receive the severance benefits.
How much severance should a startup pay?
It varies. Many companies use a formula like two weeks of pay per year of service, but small startups may offer a flat amount instead.
Are startups legally required to offer severance?
No. Severance is optional, unless a written contract or company policy guarantees it.
What happens if an employee signs but later declines the job?
Generally, there’s no legal penalty if the offer letter is non-binding, but you should keep documentation and prepare for possible delays in hiring.