The Most Common Option Grant Mistakes

This is a post I should’ve written years ago because it involves issues our firm sees from startups on a weekly basis. These are the most common mistakes – often very, very expensive mistakes – that we see startups make in granting options to employees, contractors, advisors, etc.

1. Not understanding the (big) difference between promising options and granting options.

With respect to issuing any form of equity for services, there’s usually 2 broad steps: first you promise the equity in an offer letter, consulting agreement, advisor agreement, etc., and then after that agreement has been signed, further steps have to be taken to grant the equity, including with a Board consent.

We constantly see startups pile up offer letters and other documents promising options to people, and waiting months or even years before someone conducting diligence – often in prep for a financing – realizes that none of those options were ever granted. One might think that cleaning this up is simple enough, but it’s often not. For tax purposes, option grants need to be issued with an exercise/strike price equal to their fair market value on the day they are granted (not promised).

If you hire an employee on January 1st 2020 and promise them options, they are expecting to receive an exercise price close to the equity value on the day they signed their offer letter; especially if they’re an early employee and the idea of getting “cheap” equity was part of their reason for joining. Imagine if you sit on that offer letter until June 15, 2021, after which the company has hit multiple milestones and even raised some seed money putting a value on the company 10x of what it was a year and a half ago? When you finally get around to granting those options, the strike price now has to be equal to the higher value, and the employee has lost all of that upside. Think they’re going to be happy?

We’ve seen dozens of companies make this mistake. In the worst scenarios it often leads to a threatened lawsuit, or the need for the company to materially increase the amount of equity the recipient receives in order to make up for the lost value. Other times it just results in some very very disappointed employees, and loss of goodwill.

Promising equity is as simple as signing a napkin with a few sentences. Granting equity requires valuations, consents, and well-structured equity plan documentation managed by lawyers. This is not something to DIY.

2. Getting Board approval but never delivering the (important) grant documentation.

In this instance, the Company did take the main step of properly having grants approved by the Board, but they never finished the job by actually delivering the appropriate grant documentation to the recipients.

The reason this can be a big problem is that the option grant documentation (including the appropriate equity incentive plan) will have a number of important provisions around rights the recipient and/or company have with respect to the grant. For example, it will say what happens in an acquisition, have specifics around how vesting works, or set expectations around the expiration or termination of the option. By failing to actually deliver the grant documentation to the option recipient, the Company opens itself up to arguments that all those provisions are not enforceable; which can mean litigation when the stakes get high.

Offer letters often say nothing about how a vesting schedule, or exercise period, works in the event of an employee’s resignation. Those details are in the (much much longer) grant documentation. By failing to ever deliver that documentation, you open yourself up to claims by employees that their equity continues vesting, or continues being exercisable, regardless of what the documents (that they never received) say, or what you intended for their “deal” to be.

3. Not having a 409A valuation, or having a stale valuation. 

Option grants need to be issued with an exercise price equal to or greater than the fair market value of the equity on the grant date, to comply with IRS rules that ensure no one gets a tax hit on the grant date. The IRS does not accept any equity value the company decides on. It has special requirements, including “safe harbors,” for setting the value. The most common safe harbor used is to get a professional valuation report from a reputable valuation company, like Carta.

Some companies mess up by issuing options at a price that really doesn’t make sense given the state of the business, and they don’t have a valuation report to back it up.

Other companies fail to understand that valuation reports don’t last forever. If you do another financing, you almost always need a new valuation. And if any kind of business milestone is achieved that would realistically change the value of the business – like a substantial increase in revenue – the valuation also needs to be updated. If your valuation is 9 months old, the business has doubled in size since then, and you grant options with that 9-month-old price, you almost certainly have a tax problem, for which the penalties can be substantial. After 12 months, all valuations have to be refreshed.

4. NSOs (or NQSOs) v. ISOs.

There are so many articles already written on this topic that you can find with any online search, so I’m not going to go deep into it. Just understand that employees and independent contractors do not receive the same kind of option grant, for tax reasons. Employees receive ISOs, which are usually more tax favorable. Independent Contractors receive NSOs. The documentation is slightly different.

5. Not tracking vesting schedules and exercise period expiration properly. 

Vesting schedule calculations often aren’t super straightforward. When someone leaves the company and has a portion of vested and a portion of unvested equity, someone needs to verify that the unvested equity is actually being reflected as terminated and removed from the cap table. If the equity plan also has provisions around the expiration of vested equity if it goes unexercised for a period of time post-termination (most plans do), someone needs to track that as well and ensure the cap table stays updated. Something like Carta can help a lot here, but we still regularly see people make mistakes and/or use the wrong numbers.

Companies often forget to remove terminated unvested equity (when someone leaves the company) from a cap table, or to remove a grant that has fully expired. This can create problems long-term if they inadvertently allow the person to later exercise their option (which really should no longer exist), or if they are doing other calculations, or making representations, with an incorrect cap table.

6. Promising a percentage instead of a fixed number of shares.

When companies are discussing an equity grant with an employee or other service provider, they usually speak in terms of percentages, which is good and transparent. Promising someone 100,000 shares can be meaningless if they don’t know what the denominator is. But when they actually move to document the arrangement, they should use a fixed number of shares.

By documenting a % instead of the corresponding fixed number of shares, one of two problems can arise. First, if it’s not made abundantly clear in the same document that the % is calculated as of a specific date, the company opens itself up to claims that the % is indefinite (non-dilutable). Second, if the company makes the mistake of failing to actually grant the option quickly after they’ve promised the % (See #1 above), by the time they get around to granting the option, the cap table may have changed significantly. 2% Pre-Seed is a very different deal from 2% Post-Series A. I’ve seen this mistake get very ugly.

7. Generally sloppy drafting.

“The options will vest over 48 months.”

I can’t tell you how many companies will put a sentence like this into an offer letter or option grant. Can you tell what’s wrong with it?

How will it vest over the 48 months? In equal portions each month, or some other way? When exactly does it start (offer date or employment date)? What is the vesting conditioned on? It doesn’t say anywhere that actually providing services is a requirement. Does it continue vesting even if the person is terminated? What if they leave? What if an acquisition happens?

ECVC lawyers have language banks that they rely on for situations like this to quickly and efficiently capture a concept, but with language that they know works because it’s been used 1,000 times. Nine times out of ten when a company thinks they’re saving money or time by freestyle drafting a vesting schedule themselves, it backfires.

Being well-organized can get you far in terms of avoiding the most expensive legal mistakes commonly made by startups, but given all the corporate, securities, and tax-related nuances around issuing high-valued equity in private companies, there’s always a lot that entrepreneurs don’t know that they don’t know.

The key message here is: don’t think it’s simpler than it really is (it’s not), and work with people who truly know what they’re doing. The easiest and most efficient way to stay safe is to work closely with an experienced paralegal at an ECVC law firm.

Paralegals are a fraction of the rate of the senior lawyer/partner who is likely your main point of contact on legal, but they are (at least at good firms) extremely well trained to monitor and catch these sorts of issues around equity grants, because they help process hundreds/thousands of grants a year. I’ve also too often seen companies work with over-worked solo lawyers (detached from a firm) who have no access to specialized paralegals, and in rushing review/processing they make the same mistakes founders might make. Because paralegals are cheaper, they can take the necessary time and ensure all the boxes get checked.

How Startup Employees Get Taken Advantage Of

TL;DR: When startup employees get taken advantage of in startup equity economics, it’s often not just about bad documentation or strategy. It’s about incentives, and games being played by influential “insiders” to gain control over the startup’s corporate governance. Ensuring common stock representation on the Board, independence of company counsel (from investors), and monitoring “sweeteners” given to common representatives on the Board are strong strategies for protecting against bad actors.

Related Reading:

A common message heard among experienced market players, and with which I completely agree, is this: if you are seeing significant dysfunction in any organization or market, watch incentives. In small, simple, close-knit groups (like families and tribes), shared principles and values can often be relied on to ensure everyone plays fairly and does what’s best for the group.  But expand the size of the group, diversify the people involved, and raise the stakes, and people will inevitably gravitate toward their self-interest and incentives. The way to achieve an optimal and fair outcome at scale is not through “mission statements” or virtue signaling, but focusing on achieving alignment (where possible) of incentives, and fair representation of the various constituencies at the bargaining table.

A topic that is deservedly getting a lot of attention lately is the outcomes of startup employees as it relates to their equity stakes in the startups that employ them. I see a lot being written about it in the various usual tech/startup publications, and we are also seeing companies reaching out to us asking about potential modifications to the “usual” approaches.  The problem being discussed is whether startup employees are getting the short end of the stick as companies grow and scale, with other players at the table (particularly the Board of Directors) playing games that allow certain players to get rewarded, while off-loading downside risk to those unable to protect themselves.

The short answer is that, yes, there are a number of games being played in the market that allow influential “insiders” of growing startups to make money, while shifting risk to the less powerful and experienced participants on the cap table. The end-result is situations where high-growth startups either go completely bust, or end up exiting at a price that didn’t “clear” investors’ liquidation preferences, and yet somehow a bunch of people still made a lot of money along the way, while startup employees got equity worth nothing.

The point of this post isn’t to discuss the various tactics being used by aggressive players to screw employees, but to discuss a higher-level issue that is closer to the root problem: corporate governance, and the subtle detachment of employee equity economics from other cap table players. When some people on the Board have economic incentives close to fully aligned with employees (common stockholders whose “investment” is labor, not capital, and often sunk), they are significantly more likely to deliver the necessary pushback to protect employees from absorbing more risk than is appropriate.  But if smart players find ways to detach those Board members’ interests from the employees who can’t see the full details of the company’s financing and growth strategy, things go off the rails.

Corporate governance and fiduciary duties.

Broadly speaking, corporate governance is the way in which a company is run at the highest levels of its organizational and power structure, particularly the Board of Directors. Under Delaware law (and most states/countries’ corporate law), the Board has fiduciary duties to impartially serve the interests of the stockholders on the cap table. Regardless of their personal interests, a Board is supposed to be focused on a financing and exit strategy that maximizes the returns for the whole cap table, particularly those at the bottom of the liquidation preference stack and who lack the visibility, influence, and experience to negotiate on their own behalf. That obviously includes, to a large extent, employee stockholders.

This is, of course, easier said than done. Remember the fundamental rule: watch incentives. Having a Board of directors that nominally professes a commitment to its fiduciary duties is one thing. But maximizing economic alignment between the Board and the remainder of the cap table is lightyears better.

“One Shot” common stockholders v. “Repeat Player” investors

As I’ve written many times before, anyone who behaves as if investors (capital) and founders/employees (labor) are fully aligned economically as startups grow, raise money, and exit is either lying, or so spectacularly ignorant of how the game actually works that they should put the pacifier back in their mouth and gain more experience before commenting.

Common stockholders (founders, employees) are usually inexperienced, not wealthy, at the bottom of the liquidation “waterfall” (how money flows in an exit), not independently represented by counsel, and not diversified. Preferred stockholders (investors) are usually the polar opposite: highly experienced, wealthy, have their own lawyers, heavily diversified, and with a liquidation preference or debt claim that prioritizes their investment in an exit. Common stockholders’ “investment” (their labor) is also often sunk, while major investors have pro-rata rights that allow them to true-up their ownership if they face dilution.

Investors are far more incentivized to push for risky growth strategies that might achieve extremely large exits, but also raise the risk of a bust in which the undiversified, unprotected common equity gets nothing. Common stockholders are far more likely to be concerned about risk, dilution and dependence on capital, and the timing / achievability of an exit. This tension never goes away, and plays out in Board discussions on an ongoing basis.

As I’ve also written before, this is a core reason why clever investors will often pursue any number of strategies to put in place company counsel (the lawyers who advise the company and the Board) whose loyalty is ultimately to the investors. A law firm whom the money can “squeeze” – like one that heavily relies on them for referrals, or who does a large volume of other work for the investors – is significantly more likely to stay quiet and follow along if a Board begins to pursue strategies that favor investor interests at the expense of common interests. See: When VCs “own” your startup’s lawyers. 

When Board composition is discussed in a financing, founder representation on the Board is often portrayed as being purely about the founders’ own personal interests; but that’s incorrect. Founders are often the largest and earliest common stockholders on the cap table, which heavily aligns them economically with employees, particularly early employees, in being concerned about risk and dilution.

Unless someone finds a way to change that alignment.

Founders and employees: alignment v. misalignment.

Very high-growth companies raising large late-stage rounds represent many opportunities for Boards to “buy” the vote of founders or other common directors (like professional CEOs) at the expense of the employee portion of the cap table. In a scenario where a Board is pursuing an extremely high risk growth and financing strategy, and accepting financing terms making it highly likely the early common will get washed out or heavily diluted, a typical entrepreneur with a large early common stock stake will play their role in vocally pushing for alternatives.

But any number of levers can be pulled to silence that push-back: a cash bonus, an opportunity for liquidity that isn’t shared pro-rata with the rest of the employee pool, a generous refresher grant given post-financing to reduce the impact on the founder/executive (while pushing more dilution onto “sunk” stockholders). These represent just a few of the strategies that clever later-stage investors will implement to incentivize entrepreneurs (or other executives) to ignore the risk and dilution they are piling onto employees.

Of course, it’s impossible to generalize across all startups that end up with bad, imbalanced outcomes. The fact that any particular company ended up in a spot where the employees got disproportionately washed out isn’t indicative in and of itself that unfair (and unethical) games were being played. Sometimes there’s a strong justification for giving a limited number of people liquidity, while denying it to others. Sometimes the Board really was doing its best to achieve the best outcome for the “labor” equity. Sometimes.

Principles for protecting employee stockholders.

That, however, doesn’t mean there aren’t general principles that companies can implement to better protect employee stockholders, and better align the Board with their interests.

First, common stockholder representation on a Board of Directors is not just about founders. It’s about recognizing the misalignment of incentives between the “one shot” common stock and the “repeat player” preferred stockholders, and ensuring the former have a real, unmuzzled voice in governance. Founders are the largest and earliest common stockholders, and therefore the most incentivized to represent the interests of the common in Board discussions.

Second, take seriously who company counsel is, and make sure they are independent from the influence of the main investors on the cap table. Company counsel’s job is, in part, to advise a Board on how to best fulfill its fiduciary duties. You better believe the advisory changes when the money has ways to make counsel shut up. Packing a company with people whom the money “owns” (including executives, lawyers, directors, and other advisors) is an extremely common, but often subtle and hidden, strategy for aggressive investors to gain power over a startup’s governance.

Third, any “extra” incentives being handed to Board representatives of the common stock (including founders) in later-stage rounds deserve heightened scrutiny and transparency. That “something extra” can very well be a way to purchase the vote of someone who would otherwise have called out behavior that is off-loading risk to stockholders lacking visibility and influence.

Startup corporate governance is a highly intricate, multi-step game of 3D chess, often with extremely smart players who know where their incentives really lie. Don’t get played.

p.s. the NYT article linked near the beginning of this post is provided strictly as an example of the kinds of problems that might arise in high-growth startups. I have no inside knowledge of what happened with that specific company, and this post is not about them. 

Startup Employee Offer Letters

TL;DR: A few simple principles can help founders avoid big legal landmines in making offers to their employees.

Background Reading:

Hiring an employee is one of the first areas in which I see poorly advised founders really start messing things up from a legal perspective; exposing themselves to liability and errors that can have very long-lasting effects.

Here are a few simple principles to keep in mind as you hire people and paper their employment.

An Employee Offer Letter is NOT the same thing as an “Employment Agreement.”

In the United States, the default for employer-employee relationships is “at will” employment, which means broadly speaking an employer can fire the employee for any reason, even without warning, apart from a narrow set of discriminatory reasons that violate labor laws. This is very different from other countries, which typically have more robust statutory defaults for employees.

When most people speak of an “employment agreement” they are referring to a negotiated document, usually reserved for high-level executives, that provides more robust protections to the employee/executive; including protections around how that executive can be fired, and the consequences of firing her/him. True employment agreements are quite rare in the very early days of startups.

When a startup hires a typical employee, they provide an Offer Letter that states high-level details like their position, compensation, etc., but also makes it clear that the relationship is at will; in other words, they don’t have the protections a high-level executive’s “employment agreement” would often provide. Offer Letters are not Employment Agreements. Know the difference, and that you should start with the assumption that an offer letter is what you need.

Everyone who works for you is not an Employee. Know the difference between a contractor and employee.

I often see founders casually, without really thinking about it, call everyone who does work for them an “employee.” It seems harmless, but in labor law the word “employee” can have very material implications for what you owe them, how you treat their compensation, how easily you can modify their terms or terminate them, etc. Don’t use that word indiscriminately.

Don’t forget IP / Confidentiality, which is not covered in the offer letter (usually).

The conventional structure of startup employee documentation is (i) a simple offer letter, and (ii) a more robust agreement covering confidentiality, intellectual property ownership, and (unless you’re in California or a few other states) a non-compete. This second document is usually called something like a Proprietary Information and Inventions Agreement (PIIA), Confidentiality and Inventions Agreement, or some variant of that. Missing this document can be a huge problem, and in some states fixing it is not as simple as having an employee sign it later. Don’t forget it.

Unlike most legal issues, local state law tends to govern in employment relationships. Docs vary by state.

Most tech startups are incorporated/organized in Delaware, and if they have a national footprint, a lot of their agreements will be governed by Delaware law. With respect to employees, however, that is rarely the case, unless the employee is actually located in Delaware. In employment documents, the location of your employee will often determine the documentation they have to sign, and that means the documentation can vary significantly by state. Work with your lawyers to ensure you don’t use the wrong forms.

Your offer letter might promise equity. But you still need to issue it, which is more complicated.

If you’re promising options or some other form of equity, the offer letter will usually cover that. But you need to understand that the letter is only promising the equity. To actually grant/issue the equity, more steps need to be taken, including a Board Consent and other processes.

Early-stage founders often get in hot water by signing lots of offer letters thinking that’s all they need to do for employee equity purposes, and then waiting a long time (as the value of their stock continues to go up) to be told by lawyers that the equity was never issued. Then they end up (for tax reasons) having to issue the equity at a much higher price than they would’ve if they had done it sooner, and the employees are understandably angry. Promise, then quickly grant. The offer letter is just the first step.

Startup Equity Compensation for LLCs

Background Reading:

As I’ve written before, with more entrepreneurs realizing that the “standard” (whatever that means) corporate trajectory for startups may not be what’s best for their specific company, we are seeing more tech companies explore the possibility of operating as LLCs (limited liability companies). By all accounts, C-Corps are still the market norm, especially for companies with no near-term plans to achieve profitability (everything is reinvested for growth) and with plans to raise conventional institutional venture capital.

But nevertheless, the “LLC Startup” market is real, and there’s far less info ‘out there’ for entrepreneurs to understand core concepts.  Here we’re going to cover the basics of how LLC startups typically issue equity, and how it differs from what C-Corp startups do.

The primary driver behind why LLC equity comp is very different from C-Corp equity comp is that W-2 employees of an LLC can’t hold equity in that LLC, under IRS rules. For C-Corps, both contractors and employees can hold equity, which simplifies equity compensation. But for LLCs, holding *true* equity requires the LLC to issue you a K-1 on an annual basis (you’re a “partner” for tax purposes), and the Company doesn’t cover employment taxes the way it does for W-2 employees.

Units/Membership Interests and Profits Interests (True Equity)

High-level executives (including founders) in an LLC startup are usually OK with this issue, and will hold direct equity in the LLC. They’ll receive K-1s annually.

That equity usually takes one of two forms: Units (sometimes called membership interests), which are the LLC equivalent of stock. Units can be voted (usually) on Day 1, and they are taxable on receipt if their “fair market value” is not paid for, which is why they’re typically issued only in the very early days of the company, like founder/early employee common stock in C-Corps. They can be expensive to receive if they are very valuable (in the IRS’ judgment) on the issue date.

As the value (for tax purposes) of units increases, companies will switch to Profits Interests, which are kind-of a LLC corollary to options, because (i) they only entitle you to the appreciation in value of your equity after the grant date, and (ii) when issued properly, they are tax-free to receive. When profits interests are granted, the Company has to obtain or decide on a valuation that pegs the “threshold value” of the company on the grant date, and the recipient of the PI is then entitled to the increase in value of the equity above that threshold value.

Returns on both units and profits interests receive capital gains treatment, like stock in a corporation. While units usually have voting rights, profits interests can have voting rights, but companies often times structure them to not vote.

Unit Appreciation Rights (Phantom Equity)

While founders and senior executives of LLCs will often be OK with K-1 status and holding true equity, it can become problematic for a number of reasons (tax oriented, benefits oriented, etc.) to have everyone be a K-1 recipient as the business scales. When LLCs want to issue equity-like compensation to lower-level employees, while continuing to treat them as true W-2s, they will usually switch to Unit Appreciation Rights, which are the LLC equivalent of phantom equity.

UARs don’t vote, and aren’t really equity at all. Instead, they entitle the recipient to a cash payment (like a bonus) upon some future milestone (typically an acquisition/exit) that is pegged to the value of equity. Much like profits interests, on the grant date a valuation is determined, and then as the LLC’s equity appreciates in value after the grant date, the UAR holder’s future bonus increases proportionately. When granted properly, UARs are also (like PIs) tax free on the grant date.

While the upside of UARs is that they significantly simplify tax filings/treatment for recipients (no annual K-1s, can stay W-2), the downside is that returns on the UARs are treated as ordinary income by the IRS; no capital gains treatment.

LLCs require Tax Specialists

The main reason startups choose to be LLCs is taxes: given the nature of their business, they want to avoid the corporate-level tax applied to C-Corps, even if that means deviating from the C-Corp norms of typical venture-backed startups.

But the cost of those tax savings is significant ongoing tax complexity in issuing and managing equity, and making annual tax filings. That requires not just good accountants, but good tax lawyers; who are very different from classic “startup lawyers.” If you’re planning to be an LLC that will use equity as compensation, make sure you’re using lawyers with access to solid tax counsel.

Tax Disclaimer: I’m not your tax lawyer or advisor. I don’t want to be your tax lawyer or advisor. The above is just a summary of what we typically see in the market for LLC startup equity. LLCs are highly flexible, and circumstances vary. Do NOT try to rely on any of the above advice without engaging your own personal tax advisors, including tax lawyers. 

Early Startup Employee Compensation

Background reading:

Given how deeply involved we are with early-stage startups hiring their first key employees, I figured it would be helpful to outline a few key principles to help entrepreneurs navigate the topic.

Make sure they are actually employees, and if they are, at least minimum wage.

States vary in how strict they enforce the line between contractors and employees. California is way harsher than elsewhere in the country.

In general, employees are under your control as to how they work and when they work. Contractors, on the other hand, are required to deliver a service/end-product, but have more control over how it gets done, and they usually are working less than full-time hours and have multiple ‘clients.’ Those are very rough guidelines, and you should work with lawyers to ensure you stay on the right side of your state’s (and federal) specific rules.

The employee v. contractor classification is very important, because contractors can be engaged for free from a cash perspective (equity only). Employees, however, need to be paid at least minimum wage, and may be entitled to benefits. The legal and tax requirements for engaging (and terminating) contractors v. employees are also very different.

Every startup lawyer knows stories of startups that treated someone as a contractor in order to keep costs low, then the relationship went south, and the person ended up filing complaints and getting the startup into hot water. On top of following the rules, your best protection is to be careful with whom you hire, and be respectful/thoughtful if you have to terminate them.

All else being equal, more equity means less cash, and visa versa.

Generally speaking, if someone is getting paid significantly less than what’s “market” for their position, they will expect to receive more equity in order to make up for the difference. Very early employees are generally working at below-market (often substantially below market) cash compensation, and therefore receive much larger portions of equity than someone hired post-Series A or Series B.

And the converse is true as well. If someone, for whatever reason, needs to make $X, even if it’s a serious stretch at the startup’s current budget, then their equity should be proportionately lower. And it should go without saying, all employee equity should have a vesting schedule. 

All of that being said, the early employees will of course expect their compensation to move closer to market as the startup raises funds and hits revenue milestones.

In the very early days, employees are often paid more than founders / senior executives.

The further you move away from the founder team, the greater the dilution of a person’s commitment to the “mission” of the startup; and that means more cash to keep them committed.  For that reason, at pre-seed and seed stage, it is not uncommon for *true* employee hires to actually be earning more, from a cash perspective, than the founder CEO; obviously with substantially lower equity ownership.

After a decent-sized seed round (and certainly Series A), it becomes a lot rarer for the CEO to not be the highest cash earner on the roster.

For more info on what founders are typically able to pay themselves at the various stages, see: Founder Compensation: Cash, Equity, Liquidity.

Don’t over-optimize for market data.

When you reach post-Series A or Series B, it can be helpful when hiring people to obtain hard data on what’s “market” for a certain position, and use that data in negotiations. There are some good services to help with that.

But at very early stages, everything is highly contextual. I’ve seen teams where everyone is making almost nothing. I’ve seen situations where the founder CEO is making nothing, and their lead developer is making six figures. I also see everything in-between. It all depends on the relationships and context. Maybe ask around if you need to, or do some AngelList Jobs perusing, but don’t put too much faith in the value of broad market data for your pre-seed or seed stage startup’s hiring needs.

Employment laws and taxes are not a place to move fast and break things.

Finally, as much as I appreciate keeping things lean, moving fast, and skirting the rules where the costs are low, realize that violating laws around employee compensation and hiring/firing can burn you, badly.

In some contexts, unpaid employee compensation is even recoverable against the Board or executives, outside of the Company. Did you catch that? Let me repeat it for you: failing to pay employees compensation you promise them, or taxes for that compensation, can in some contexts result in personal liability for you, even if the company itself files for bankruptcy.

Take. This. Sh**. Seriously. While I’ve seen more than my fair share of nuclear wars between founders – see: How Founders (Should) Break Up – the deep relationships among founders often allow for more leeway in terms of following/not following the letter of the law. Employees are usually different, and will hesitate significantly less to use every weapon against you if you cross them. Make sure you’re well-advised from the moment you bring on your first *true* hire.