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Startup Shares 101: Navigating the Complexities of Share Calculations
In the intricate world of startup finance, understanding share calculations is crucial. What seems like a straightforward counting exercise quickly becomes a nuanced exploration of different share types and calculation methods. Let's break down the three key ways startups measure their shares.
Startup Equity Compensation: The Basics
For startup founders and entrepreneurs, equity compensation is more than a recruitment tool. It builds an ownership culture, attracts top talent, and aligns employee incentives with company growth. Understanding the fundamentals of equity plans helps you design a structure that supports long-term success.
Corporate Conversion: Navigating Business Structure Transitions
As your business evolves, the legal structure that worked in your startup phase may no longer be the best fit. Corporate conversion - the process of transitioning from one entity type to another - can help align your company’s structure with your growth, funding, and succession goals.
Foreign Qualification: An Overview
Determining where your startup needs to qualify to do business can be a complex challenge, especially in an era of remote work and digital commerce. This memo provides critical guidance on understanding when and where your startup may need to qualify to do business.
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.