Resources for insight and
inspiration
Guides
Insights
Employee Termination for Startups: What Founders Need to Know
Firing an employee is one of the most difficult parts of running a startup. Whether due to performance issues, role redundancy, or a strategic shift, termination is not only a business decision but also a legal one. If handled poorly, it can lead to lawsuits, damage team morale, and affect your ability to attract future hires.
Contractor or Employee? A Startup Founder's Decision Guide
Startups thrive on flexibility, and independent contractors often feel like the perfect solution. But the distinction between contractor and employee carries real legal weight. Get it wrong, and your company could face IRS audits, back taxes, wage penalties, and even personal liability.
FAQs
Open allDo drag-along rights apply to founders?
Yes, they typically bind all shareholders—including founders, employees, and option holders - unless carve-outs are negotiated.
Why do investors want drag-along rights?
Investors use drag-along rights to ensure that all shareholders participate in a sale, avoiding minority holdouts that could block or delay an exit.
Can anti-dilution rights be negotiated?
Yes. Founders can push for broad-based weighted average terms, carve-outs for employee equity, or even conditional waivers to maintain alignment with investors.
Why is full ratchet considered founder-unfriendly?
Because it resets the conversion price to the lowest new share price, which can drastically dilute founders and employees even if only a small down round occurs.
What is the most common anti-dilution protection?
The broad-based weighted average formula is the market standard, striking a balance between investor protection and founder dilution.
What triggers anti-dilution adjustments?
Issuing new equity at a lower price than earlier rounds (a “down round”) typically triggers the adjustment.
Do liquidation preferences matter in a large IPO or acquisition?
In big exits (10x+ invested capital), liquidation preferences usually have little impact since all parties receive strong returns, but they can still influence exact distributions.
Are liquidation preferences negotiable?
Yes. Founders can negotiate for 1x preferences, caps on participation, or paripassu treatment across rounds to maintain balance.
What happens if my company exits below the total invested capital?
In this scenario, all proceeds go to preferred shareholders up to their preference amount, and founders may receive nothing.
What is a standard liquidation preference in venture deals?
Most deals use a 1x non-participating liquidation preference, meaning investors get their original investment back first, but no more.
When should a startup use a SAFE instead of a convertible note?
SAFEs are best for early-stage, fast-moving fundraising where simplicity and speed are critical, while convertible notes may be more appropriate if investors prefer debt protections.
Can multiple SAFEs cause dilution issues?
Yes. Issuing SAFEs at different caps can lead to more dilution than founders expect when they all convert. Careful modeling is important.
Do SAFEs always include a valuation cap?
Not always. Some SAFEs are uncapped, though most include either a cap, a discount, or both to reward early investors.
What is the main difference between a SAFE and a convertible note?
A SAFE is not debt, meaning it has no interest rate or maturity date. A convertible note starts as debt and must either convert or be repaid.
When should a startup consider raising with convertible notes?
They are most useful at the pre-seed and seed stage, or as bridge financing between rounds, when valuations are difficult to set and speed of funding is important.