WALKER CORPORATE LAW GROUP, PLLC » Miscellaneous

Gone Fishin’

Scott Edward Walker — Fri, 29 Jul 2011 23:49:35 +0000

We’ve gone fishin’ for the month of August. No blog posts until September. Happy Summer days.

www.youtube.com/watch?v=IqdtzJvliMk

How to Hire a Superstar Engineer for Your Startup

Scott Edward Walker — Fri, 03 Jun 2011 00:25:55 +0000

Introduction

This post was originally part of my “Ask the Attorney” series which I am writing for VentureBeat (one of my favorite websites for entrepreneurs). Below is a longer, more comprehensive version. Please shoot me any questions you may have in the comments section – or feel free to call me directly at 310-288-6667 (Los Angeles) or 415-979-9998 (San Francisco). Many thanks, Scott

Question

We launched a consumer internet site about a year ago, and we’re starting to get some really good traction. We’ve spoken to a bunch of angel investors and they all told us that we need to get an engineer on our team (my partner and I are both business guys and we outsourced the development). The problem is we’re in Silicon Valley, and we obviously don’t have the money to compete with the big tech companies for talent. Can you please give us some advice on hiring a superstar engineer and the key legal issues that we should be addressing. Thanks!

Answer

On the business side, I think the only way you’re going to be able to attract a superstar engineer is to treat him (or her) as a co-founder from an equity perspective – which means offering him 10-20% of the equity. You also must get him really excited about your startup. As Seth Sternberg, the co-founder and CEO of Meebo, recently discussed (see video below):

“Engineers want to build awesome product. They want to change the world. . . . If an engineer is really passionate about the problem that they are going to solve, then they can get excited about your startup….”

On the legal side, there are a number of significant issues that you need to button-down.

1) Equity Issuance. At this stage of your company, it will likely be problematic to issue shares of common stock (as opposed to stock options) to the engineer because of the potential tax liability. Indeed, unless the engineer purchases the shares for their fair market value, the issuance will be deemed compensation to the engineer; and he will have to pay ordinary income tax at the federal and state level, and the company will have tax withholding obligations. There are also tricky securities law issues.

Accordingly, you’re going to have to set-up a stock option plan and issue stock options to the engineer, which are not taxable upon issuance and can be easily tailored to comply with applicable securities laws. As I have previously discussed, however, stock option plans are complicated and will require compliance with Section 409A of the Internal Revenue Code – which means you will need to value your company (typically by retaining an outside appraiser) to ensure that the exercise price of the stock options is equal to the fair market value of the underlying shares of common stock as of the grant date.

2) Vesting. The other important issue you must think about in the context of the options issuance is a vesting schedule in order to incentivize the engineer to remain with your company and to help grow its business. The most common schedule vests an equal percentage of options every year for four years, with a one-year “cliff” (i.e., 25 percent of the options vest after 12 months) and then monthly, quarterly or annually vesting thereafter – though monthly is the most common.

For key employees, like the engineer you intend to hire, there is also generally a partial acceleration of vesting upon a triggering event (such as the sale/change of control of the company or a termination without cause); or more commonly, two triggering events, such as a sale/change of control followed by a termination without cause within 12 months thereafter.

3) Offer Letter. To protect your company, it is important that the engineer execute some form of offer letter or employment agreement, which will set forth all of his rights and obligations, including position, compensation (including stock options and vesting), benefits and, most importantly, that the relationship is “at will.”

If things don’t work out, the company must have the flexibility to terminate the engineer’s employment with or without cause – and that’s what “at will” means. And, again, everything must be in writing because you certainly don’t want a situation down the road where you need to replace him, and you get into a dispute with regard to what his deal was and whether, for example, he is entitled to severance if he’s terminated without cause.

4) IP Agreement. The engineer must also execute a Confidential Information and Invention Assignment Agreement, which is designed to prevent disclosure of the company’s trade secrets and other confidential information and to ensure that any intellectual property developed by the engineer is legally owned by the company.

Note, however, that under California Labor Code Section 2870, an employer may not require an employee to assign rights in an invention that the employee developed entirely on his/her own time without using the employer’s equipment, supplies, facilities or trade secret information except for those inventions that either: (i) relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or (ii) result from any work performed by the employee for the employer.

5) Minimum Wage. Finally, make sure you pay the engineer at least the minimum wage. A lot of startups make the mistake of hiring a key employee and merely give him or her “sweat equity” in lieu of any ongoing cash payment/salary. Unfortunately, this is illegal in California and could lead to criminal liability. So be careful — this issue can really come back and haunt you, particularly from a disgruntled employee.

Conclusion

I hope the foregoing is helpful. Below is the video referenced above in which Seth Sternberg discusses his hiring philosophy with startup guru Chris Dixon in a must-see episode of Founder Stories. (It is best viewed in chrome or firefox.)

HAPPY HOLIDAYS!

Scott Edward Walker — Thu, 23 Dec 2010 06:25:51 +0000

Happy Holidays and best wishes for the New Year. It’s been an amazing 2010 at Walker Corporate Law Group, and my colleagues and I want to thank all of our clients and friends for their support. Our offices will be closed until Monday, January 3rd. No blog posts or tweets until then. Cheers (and enjoy Louis Armstrong below), Scott

www.youtube.com/watch?v=KQQU2ykEQqo

Gone Fishing

Scott Edward Walker — Wed, 04 Aug 2010 05:45:15 +0000

We’ve gone fishin’. No blog posts or tweets for a couple of weeks. Happy summer days.

www.youtube.com/watch?v=IqdtzJvliMk

Walker Twitter Highlights & Holiday Greetings

Scott Edward Walker — Mon, 21 Dec 2009 02:37:44 +0000

For those of you who missed this week’s Twitter updates, below you’ll find highlights of our top tweets from December 13th though December 20th. If you would like to see all of our tweets (or if you would like to receive an RSS feed of them), you can do so here.

If you have any questions or comments with respect to any of the tweets below, please contact us through the comments section of this post.

Finally, we would like to wish all of our clients and friends Happy Holidays and best wishes for the New Year. We will be offline until Monday, January 4th. Many thanks, Scott

ScottEdWalker

Top 5 Tweets

Tech M.&A. Expected to Rebound After Weak Year (via NYT Dealbook) – “2010 to be quite a busy year” http://bit.ly/7tzMU4
Should Start-Up Founders Forget About Business Plans? (via WSJ Blogs) – good brief video of HubSpot CEO Brian Halligan http://bit.ly/4Bnibo
Another Merger of Two Big Law Firms http://bit.ly/4Hax1M. Watch your pocketbook, as I discuss in a brief video here: http://bit.ly/8xRGZq
Chinese Start-Ups Turn Up Noses At U.S. IPOs, Exiting Close To Home (via WSJ) – VC’s are “souring on U.S. exchanges” http://bit.ly/87tSK7
“To think is easy. To act is difficult. To act as one thinks is the most difficult.” Goethe http://bit.ly/7PIckJ

Walker Blog-Post Related

New blog post – “Angel Financings: Five Tips for Entrepreneurs – Part 2″ http://bit.ly/7U9Q1O

Walker Twitter Highlights: November 30th – December 5th

Scott Edward Walker — Sun, 06 Dec 2009 20:39:52 +0000

For those of you who missed this week’s Twitter updates, below you’ll find highlights of our top tweets. If you would like to see all of our tweets (or if you would like to receive an RSS feed of them), you can do so here.

If you have any questions or comments with respect to any of the tweets below, please contact us through the comments section of this post. Many thanks, Scott