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Start-up issues for High-Technology Start-ups

February 10, 2003

Dave Neal and Merrill Mason

Employee Legal Issues in Start-Ups

Employment Basics

  1. At Will
    1. Employer can fire you for any reason at any time.
  2. Protected Classes
    1. At will right has eroded. Cannot discriminate
  3. Employment Agreements?
    1. Employer wants to have an

                                                              i.     Assignment of Inventions

                                                            ii.     Non-compete

    1. Employees often receive severance in return

Acronyms of Employment Laws

  1. ADA – Americans with Disabilities Acts – If someone has disability then you must make reasonable accommodations for them to be hired or continue working for your company. Lots of litigation from this act. Alcoholism is a disability. Applicable when company size greater than 50.
  2. ADEA – Age Discrimination in Employment Act – Can not discriminate against older workers.
  3. ERISA/COBRA – Employee Retirement Income and Securities Act. Has to do with 401(k) and retirement benefits
  4. FLSA – Fair Labor Standards Act – Contains minimum wages legislation. Overtime for bottom-of-the-chain workers after 40 hours/week.
  5. FMLA – Family Medical and Leave Act. Applicable when company size greater than 50.
  6. Title VII –  Cannot discriminate based on race. Applicable when company size greater than 15.
  7. Workers’ Compensation. Applicable when company size greater than 3 (in North Carolina).

Employer Mistakes

1.       Use of Consultants (be sure use is considered by IRS as consulting based on 20 point test)

2.       Exempt vs. Non-Exempt Employees (overtime payment for non-exempt, lower level employees)

3.       Sexual Harassment

4.       Performance Assessment and Management

Independent Contractors

1.       IRS Cares Due to Tax Issues (not withholding anything, IRS wants to make sure they get the proper payments)

2.       Company Cares Due to Benefit Issues

3.       20 Point Test published by IRS to determine if they are independent contractor

4.       What Is A True Independent Contractor?

 Exempt vs. Non Exempt

1.       Culture of Start Ups

2.       FLSA

3.       Management vs. Admin v. Professional

4.       Discretion and Independent Authority

5.       Avoid with Job Classification Audits

6.       Damages

Sexual Harassment

1.       Again, start up culture is an issue (less bureaucratic)

2.       What are employer obligations?

3.       How do you emphasize as a priority?

4.       Consequences

Performance Mgt.

  1. Hiring Phase – Checking references hard since it is not good for persons to say anything for liability reason (Is s/he eligible for re-hiring).
  2. Early in Employment-Trial or 90-day Probation Period?
  3. Pulling the Trigger&ldots; Do what you have to. Things do not often turn around.
  4. Managing Terminations (Should never be a surprise. Meet with person up front, identify deficiencies, get signed document, have review period.)
  5. Pitfalls – Wrongful Termination, Slander (why people don’t do good job references, people afraid of giving references as people have been sued and accused of saying untrue things about employee). Keep good records. Be honest on all reviews.

Common Problem-Tardy Non-Compete / Assignment of Invention

  1. Your Client Company Hires A Biochemist for Drug Discovery
  2. Due to Usual First Day Shuffle the Agreements Are Not Signed By the New Employee
  3. The Oversight Is Discovered Six Months Later When the Employee Leaves for a Better Offer
  4. The Biochemist Has Played A Key Role in the Drug Development Process

Problem: Biochemist can go make same drug for another company.

  1. Are Your Non-Compete and Invention Assignment Enforceable?
  2. Who Owns the Intellectual Property?
  3. Is the Affected Person Easy to Deal With?

Never let person start work without signing documents.

  1. Get An Assignment and Non-Compete from the Employee
  2. Provide Employee With Additional Consideration
  3. Hard and Fast Rule regarding Beginning Work
  4. Process Checklist Required Complete Before Work Can Begin
  5. Send to Employee Before They Arrive on Premises so they can walk in ready to sign

Common IP/Employment Problem-"The Perfect Hire"

New hire may have encompassing non-disclosure a greement with prior employer in same industry. Check on this.

  1. Your Client – Start-Up Company in Photonics Space
  2. Client Has Achieved Coup – Hires IBM’s Photonics Guru-He’s Ready to Be More Entrepreneurial
  3. The Guru’s Most Recent Work Is On IBM Product Similar to Your Central Idea
  4. Therefore, Key Technical Person Has A Leg Up, Allowing Client to Move to the Technical Forefront

Issues Presented-"The Perfect Hire"

  1. Great Qualifications with Great Liabilities
  2. What Sort of Agreements Does the Guru Have with IBM?
  3. Even If There Is a Logical Argument That Your Product/Design Is Different?
  4.  How Will Former Employer Behave?
  5. What If You Complete Your Product Before You Realize You Have IP Issues?

Counseling Client -"The Perfect Hire"

  1. Specific -How Close Are the Technologies In Question?
  2. Specific – What Did He Sign with Former Employer?
  3. General-Educate Managers to Know Source of IP
  4. General-Interview and Hiring Process
  5. General – Presentation of Agreements At Correct Stage

A "Consultant" Helped-Issues Presented

  1. Does Client Have Clear Title to IP in Software?
  2. If Not, Who Else Has a Claim to the IP?
  3. Investment Discussions Are At A Standstill
  4. Leverage in Resolution Discussions
  5. Lack of Payment For Expert’s Services- Exculpatory?

Problem- A "Consultant" Helped-Who Owns IP?

  1. Client Company Has Developed Revolutionary Software Solution
  2. At Investor Presentation Technical Founder Lauds Software Architecture Help From NCSU Prof.
  3. Beta Version of the Solution Has Just Been Completed    
  4. Completed Version Clearly Reflects NCSU Prof’s Architecture Ideas
  5. Technical Founder Says Not to Worry Because the Prof. Was Not Paid for His Contribution

"Consultant" Helped-Counseling Your Client

  1. Specific -Does the Software Architecture Have to Remain the Same?
  2. Specific-Will Prof. @ NCSU Assign Rights? How Much?
  3. Specific- Do You Need to Approach NCSU?
  4. General – Educate Technical Staff About Slippery Slope
  5. General – What Is the Creation of IP?
  6. Employee Leaves Company On Good Terms
  7. Six Months Later Your Client Sees Her at Trade Show
  8. Her New Company Is Offering a Product Strikingly Similar to Yours
  9. She Worked On Your Main Development Team Prior to Departure
  10. Your Client Observed the Former Employee Make Multiple Sales at the Trade Show



This MBA Series Notes article was written by Dave Neal and Merrill Mason, taken by Ryan Allis on 2/28/2005

Notes Disclaimer: No warranty is made as to the accuracy of the information contained in these notes. They are notes taken from a live class and as such inaccuracies are possible. This site, nor any parties mentioned, will not accept any responsibilities or liability for actions taken based upon these notes. Please consult professional legal advisors when making any business or legal decision.