5 of the Dumbest (and Most Costly) Startup Mistakes, Part 22 min read

For those of you who just joined in, I am a corporate partner at a Gunderson Dettmer – a Silicon Valley based law firm that works exclusively for technology companies and VC’s. I make my living working for startup companies but I want to help you spend less money on lawyers.

I spend an awful lot of time (usually on short notice the night before an important deal is supposed to close) fixing preventable problems. An awful lot of these problems relate to hiring, compensating and incenting early employees. All of them cost money and time that I would rather see invested in building teams and product.

Over the next few Wednesdays I’ll be posting a few short pieces that may help you avoid, last minute fire drills, unnecessary accounting or legal fees, angry investors and perhaps an occasional lawsuit or regulatory audit. Hopefully by highlighting a few of the most common employment related problems I can help you avoid them.

5 of the Dumbest (and costly) Mistakes Startups Make with Their People, Part 2

1. MISTAKE # 1 OF 5: Not Understanding Obligations to Prior Employers

2. MISTAKE #2 OF 5: Failing to be Informed About Employee Rights with Respect to Wages

The same employee-favorable regime that can help entrepreneurs when they are leaving a job, can cut the other way when it comes to a startup founder’s new role as the employer.

Paying your people can be a big challenge in the pre-funding stage and there are not always easy answers.

At a minimum, entrepreneurs need to understand the rules and be educated about the risks they take so they can minimize their exposure.

The bottom line is California requires employees make at least minimum wage (and at least two times that amount for exempt employees for whom you don’t have to pay overtime). Wages must be paid in cash. More importantly, claims for unpaid wages cannot be released or waived. Once someone has worked without pay, they can bring a claim and the burden of proof is on the employer.

Not surprisingly, the states doesn’t typically have the resources to actively pursue violations, where the practical risk often lies is when a relationship goes south and that co-founder or early team member leaves under acrimonious conditions and decides it’s time to get paid for the time they worked without salary.

Alternatively, you might have a great team that makes it all the way to an exit intact only to find that a public company buyer with a dramatically different risk tolerance doesn’t want to assume material exposure for unpaid wage claims and these matters become a real deal issue.

While there may be periods of time where there simply isn’t cash to pay salaries, companies can manage their exposure and mitigate risks if they get good advice on the rules, including the tax issues, and make educated decisions about how to document and manage these issues.

Next week I will address mistake #3 of 5: Employees Versus Independent Contractors.

Brian is a partner at Gunderson Dettmer’s Silicon Valley office. Brian’s business law practice is focused on the representation of emerging growth companies, especially tech startups, throughout their lifecycles and in the representation of venture capital and private equity investment funds. Brian is broadly experienced with business and corporate formation and governance matters, deal structuring, equity and debt financing transactions, public offerings, a variety of M&A transactions, strategic, partnering and commercial transactions and fundamental intellectual property, employment and stock and option matters.

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