Contracts · Contract negotiation

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

Zack Herman

April 9th, 2015

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.


Eric Wold

April 9th, 2015

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.

Jake Carlson Software Development Manager at Oracle

April 9th, 2015

IMO non-competes make more sense than exclusive IP assignment. Anyone that asks me to not re-use any of my code I develop really doesn't understand software. Ways to solve a problem are the manifestation of experience. They are the tools I use to get the job done. Any developer that claims to not re-use code they've developed over the years is either not a good developer or a liar.

If you think about it, what you *really* want is for the developer to not harm you by taking the code he/she developed and make a competing product. What does it matter if he/she uses the code in a completely unrelated project? It doesn't.

Just make sure the non-compete is broad enough to prohibit any possible overlap while not unnecessarily restricting the developer from working on unrelated projects.

Doug Bend Legal Counsel For Entrepreneurs @DougBend • Real Estate Broker @BLGProperties • Co-Founder @AgentFound

April 9th, 2015

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.

Andrew Martz Andrew F. Martz: Ideation, Strategic, Maximizer, Futuristic, Self-Assurance

April 9th, 2015

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 Martz Andrew F. Martz: Ideation, Strategic, Maximizer, Futuristic, Self-Assurance

April 9th, 2015

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!

Ben Sweat Director, Product at Idealab

April 9th, 2015

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.

Rob G

April 9th, 2015

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.  

Robert Anderson Founder / Principal Engineer at Shifty Logic

April 9th, 2015

Things I agree with:
- vesting
- limited non-compete
- IP assignment
- royalty-free rights to code I write for you

Things I disagree with:
- exclusive code rights. I bring a lot of code with me from being around for a while. I get work done fast because I leverage that code. I will always retain ownership of my re-used code. It is one of the reasons I've been starting to release a bunch of it as open source. That way, there is no debate about my intentions.
- NDAs are bad unless you have a very specific reason (such as a mutual NDA between corps). Search for "why I don't sign NDAs" on google for all the reasons they are a bad idea for tech people to sign. You seriously limit my ability to work beyond you, you establish an immediate lack of trust which is a bad way to start a business relationship, and you put me in a position of potential legal trouble immediately for things out of my control. Articles online will make the reasoning more clear. Even companies like Microsoft and Amazon don't make new employees sign NDAs anymore (limited non-compete and employee agreements are fair game).

Steve Simitzis Founder and CEO at Treat

April 10th, 2015

Regarding non-competes: if you're in California, non-competes are unenforceable. Just leave them out.

IP assignments are a must if you ever plan to take investment. Your deal may fall apart during diligence if the attorneys can't figure out who owns the product they're investing in. I wouldn't take a chance on this.

In practice, an NDA is far from bulletproof, but for me it's to establish trust. Most people will behave ethically when reminded (in writing) what that means. 

Robert Tolmach Entrepreneur and Social Entrepreneur

April 9th, 2015

Vesting! You can read lots about cliffs and vestings on quora.com.