Navigating the New Hire Process for Startups

Navigating the New Hire Process for Startups

In this episode of Startup Hustle, Matt DeCoursey and David Siegel, Partner at Grellas Shah LLC talk about what to include in employee agreements, compliance issues to consider, and how to navigate the new hire process for startups.

Covered In This Episode

Are you familiar with navigating the new hire process? How does your company handle recruiting, assessing, and retaining employees? As a business owner, you know the hiring process is equally important (arguably more) to all the other processes in your startup.

Find out more about it in this Startup Hustle podcast episode.

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Highlights

  • Guest backstory (01:40)
  • Navigating the new hire process (03:44)
  • Employee vs contractor, your audiences (05:35)
  • How to avoid compliance issues (08:08)
  • Treat someone with dignity when letting go of people (11:27)
  • What contracts need to have (12:30)
  • There are very few things that are less liquid than ownership for non-publicly traded startups (15:33)
  • Some businesses are a bit harder to roll out. (17:40)
  • Outsourcing and local contracts (20:01)
  • Find a good legal provider and good people who can give you advice (21:46)
  • Federal Laws and Compliance, Employees, and Contractors (23:11)
  • One area of law that’s important as contracts (25:53)
  • Equity is a finite pool (27:49)
  • Slicing the Equity Pie, sweat equity (28:43)
  • All about Diligence (30:29)
  • Simple Agreement for Future Equity (33:28)
  • Real-life examples: How to know when to stop (35:08)
  • CA has unique employment laws (37:47)
  • Exceptions for liability (39:01)
  • Lawyers have value, but you can’t spend your money on legal fees when you’re a startup (41:32)
  • The best advice for startups (43:07)
  • The way people resign is going to feel hostile at the beginning (44:56)

Key Quotes

The place to start is actually whether what you’re doing is even hiring an employee and that, particularly for the earliest stage companies, is an important question. Fortunately, one that more often than not is not answered correctly.

David Siegel

Sometimes you have to free people up for their own future. If you have the wrong people in the wrong roles and you kind of owe it to yourself to make that change.

Matt DeCoursey

If you have no funding and you have to consider people, independent contractors, understand the risk that you’re taking in doing that. Transition them to being employees as soon as you do have funding.

David Siegel

Get actionable insights on how to best navigate the new hire process in today’s Startup Hustle episode.

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Rough Transcript

The following is an auto-generated text transcript of this episode.

00:00.00
Matt DeCoursey
And we’re back for another episode of Startup Hustle. Matt DeCoursey here to have another conversation I’m hoping helps your business grow. Are you capable of navigating the new hire process? Are you any good at recruiting, assessing, retaining, or employing people? If you want to build a business and be successful. You’re going to need to learn about everything I just mentioned and a whole lot more today. We’re going to talk about navigating the new hire process before I mention before I introduce who I’m having a conversation with today. If you are thinking about starting a new business or expanding the current None, if you are, then it’s important to get it set up and maintain properly. That’s exactly with the folks at http://universalregisteredagents.com. do. You find a link for that in the show notes. To do, LLCs, S Corp, C corp, nonprofits, no problem, you can learn more once again by clicking the link in the show notes. Also, information in the show notes about today’s guest, and that’s David Siegel. David is a partner at Grela Shaw, it’s a law firm in Cupertino, California. Does that ring a bell? That’s where Apple is, that’s where the infinite loop is. I think that’s the street was it, 1 Infinite Loop and Cupertino, California, right there in and around the world of tech and startups. So David, welcome to Startup Hustle. Well, let’s go. Let’s get our conversation started with.

01:22.84
David Siegel
Thank you for having me.

03:00.96
Matt DeCoursey
You given us a little bit of your own backstory.

01:41.24
David Siegel
Yeah, sure. So um I work at our offer firm called Grellas Shah we are in the heart of you know Silicon Valley so the heart of startup land though. Startup land has certainly expanded throughout the United States and the world and so of our clients. Um. In terms of what I do I represent ah mostly tech-related startups from kind of formation stage through their kind of maturity. Um, and that involves, you know the big events like incorporating and funding rounds and m and a but. You know, a lot of the day-to-day is talking to startups about more routine matters like how to handle employee issues, how to bring on employees what it means to bring on an employee. Um, when issues arise with employees and unfortunately when. Terminations happen that is just part of the game as well and that’s in any company but that is what we do and we love doing it.

05:09.24
Matt DeCoursey
Well, there’s a lot to be considered and that’s why I said at the beginning of the show if you don’t have experience doing all this stuff. Um, well, that’s a big reason why a lot of people hire my company because we help people build software teams quickly and affordably and help you not have to.

04:14.52
David Siegel
Sure yeah.

05:46.60
Matt DeCoursey
Deal with so I said recruiting, assessing, retaining, and employing which we cleverly use the acronym rare for that. But it’s rare when people are actually really good and experienced with it, especially at the base at the beginning entry-level Phases. We talk about both being involved. Startup and early-stage businesses. Well until you have experience doing something. You don’t have experience doing it and there’s a lot of complexity that can go into it in consideration and just some of that’s just basic humanity. Ah you mentioned like if something’s not working out like how do you.? Let someone go in a way that’s respectful productive and you know and with that So when we talk about new navigating the new or hire process I mean what? where do we start.

06:01.88
David Siegel
Well, the place to start is actually whether what you’re doing is even hiring an employee and that particularly for the earliest stage companies um is an important question and um on. Fortunately, one that more often than not is not answered correctly. Um there. Yeah so at base there’s you know, None categories.

08:10.40
Matt DeCoursey
Tell tell me why.

07:06.56
David Siegel
That one can be slotted into and is this person actually an employee or are they some sort of independent contractor and the realities of ah, a lot of startups is they assume they’re hiring the latter and an independent contractor. When they’re really hiring an employee and don’t know it because to a large extent because they don’t have either the knowledge or the funding to or sometimes even the time to deal with hiring an actual employee because employee employment is. Much less flexible than in hiring independent contractor.

09:50.24
Matt DeCoursey
Well and that and that separation between employment and contractor is pretty broad. There’s you know there’s a lot of things that you have to provide and are required I Run I run into the same issue a lot and I was talking to ah a business owner the other day who. Like all these people are quote contractors and I was like dude if they’re showing up and working for you every single day and and and like you can’t do that You can’t because you’re you’re misaligned with a lot of things that are going to get you in Trouble. What are a few of those things like there. You know that you you what are we trying to avoid by understanding the difference between an employee and a contractor.

09:50.30
David Siegel
Yeah, so so let’s talk about what happens if you mess that up and ah just taking a step back when talking about the startup world. There’s usually when you’re in legal issues. You’re usually talking about None audiences. There’s. If you screw something legally is some agency or something going to come after is the government going to come after you for breaking some law that’s audience number None audience number 2 is if you’re a if you’re going the Vc route. Um or m and a route is are you going to get tripped up in diligence.

12:06.42
Matt DeCoursey
Um, yeah.

11:08.62
David Siegel
Um, so it doesn’t really matter if no government agency would go after you. It’s just as big a problem if a VC or an acquirer is not going to do business with you because you screwed something up so that’s used. So usually we’re talking it is actually in reality it is a bigger problem.

12:51.20
Matt DeCoursey
I think that’s a bigger problem. That’s a bigger problem the governmental the government will like give you a notice and maybe a small fine or something on the first one. But if you block yourself from being able to expand, grow or provide resources for your business. That’s way more devastating.

11:58.86
David Siegel
That is true that I fully agree with that, which is why I always separate out audiences because when we’re talking about legal compliance and startups just different than other businesses, but employment is the one area where there’s a None audience in the None audience. Are the people that you hire because this is the one area of law that almost all startups get involved in where if you don’t do things correctly, the service provider probably will be able to sue you and it is one of the most like. Tiious areas. It is not that hard for someone to get an a lawyer on contingency where they don’t have where the employee contractor. Whatever a service provider doesn’t have to pay by the hour, they’re very easy to find, and there’s also, um, many states have ways to file complaints. Um, without a lawyer and have the and and get whatever it is they think they’re entitled to. So um, when we’re dealing with employment law. We’re we’re dealing a lot with category three like are you going to get sued because this is an area where you can get sued. Um and it’s not unusual.

15:43.98
Matt DeCoursey
So what’s the material nature of some of those suits like what are people getting sued for how can we? How can we be a little more exact about helping our listeners. Avoid some of the stuff.

14:47.14
David Siegel
So yeah, so so most typically to be honest, um at the earliest stages. It’s getting sued over the um over whether somebody’s an employee or independent contractor. That’s where the lawsuits tend to usually be at the early stages and they tend to happen. Be quite honest when there’s a relationship breakdown. Um, that is in the sense that um, everyone comes in perfectly fine with this being an independent contractor relationship when it’s not legally not but nobody knows and then there’s a breakdown in the relationship and the service provider is. Unhappy with the company and then goes and finds a lawyer and so there’s a couple of ways of dealing with this one is I mean the lawyer answer is don’t make that mistake if somebody you know, figure out whether somebody should be an employee and then treat them as an employee. That is the best advice I could give and the least practical advice I can give because the reality is um and we’ll probably get here is that if you’re hiring somebody as an employee you have to pay them cash that you might not have. There’s no. Paid them in equity is not a thing under any law that is relevant to this area of the world. That’s not proper payment for an employee So the reality it is.

18:57.50
Matt DeCoursey
Well and in some cases that could potentially create a tax liability for the person receiving equity because things that that that’s it. That’s an exchange of value.

17:49.64
David Siegel
None now. Oh sure can defense yes but that was the yes for surface.

19:28.36
Matt DeCoursey
For services rendered which is the definition of income.

18:09.98
David Siegel
Yes, yeah, that’s that’s something else that people don’t always realize is that um just because you’re not paying someone in cash doesn’t mean they’re not taxed if you pay someone in equity. You’re paying them. Whatever the value of that equity is and they pay tax on that the same way they would pay it in cash. Um, which maybe sometime down the road in this conversation. We could talk about None b’s and what those are for but let’s I think leave that aside for a moment but um so the none piece of advice would be if.

20:11.28
Matt DeCoursey
Yep yep.

19:15.66
David Siegel
If somebody’s employee hire them as an employee and follow labor laws which is as said it’s not necessarily that practical as a piece of advice but we can talk a little bit more about that in a minute there is though another piece of advice and yeah, well it’s it’s.

20:59.20
Matt DeCoursey
Well, I think it’s super practical David it’s that it’s a pretty well-defined set of boundaries to work within now. Granted there’s a lot of definition in there. But you know there’s not a whole lot of true.

19:52.70
David Siegel
Work lot. Yeah, but you have to have cash you have to have it’s all about the cash you have to have cash and if you don’t have cash to pay people then maybe you take the risk of hiring them is not the legally right thing to do but hiring them as an independent contractor and if you are forced into that situation just from practicality. Um, this all kind of harkens back to something you said at the beginning because I mentioned the word terminations because lawyers always employment. Things have to think about that. Um, but you talked about treating people with dignity. Yeah, when you’re terminating them and this is I mean there are great, ethical and moral reasons to treat somebody with dignity when you are terminating them. There are. There are selfish reasons to treat somebody with dignity when you terminate them, None being um, not incentivizing them personally to sue you you know if things seem like they’re breaking down come up with you know, be respectful in how you terminate them separation agreements.

23:21.42
Matt DeCoursey
Yeah.

22:18.90
David Siegel
Or Severance agreements. Um you know of some sort. Um, if you can do it make sense to have them release claims those are legally enforceable agreements that you can enter into as somebody’s exciting if there’s kind of a higher risk situation with someone. So. Those are ways at the end to deal with them to try to avoid lawsuits over this kind of thing and and they work so something is something.

24:36.14
Matt DeCoursey
You said you said something earlier that so I’ve got a little bit of a trigger warning here you mentioned something about you bring in people on and things are great in the beginning. I Talk about this a lot. So if you’re going to have a good agreement with anyone whether it’s an employee a partner a client a lender an investor contracts and agreements need to have sunny day and rainy day.

24:08.92
David Siegel
Yes.

25:34.16
Matt DeCoursey
Provisions in them meaning what happens if things aren’t working out. How are we going to handle that and you have to get into some things that are very that are that are deep and and topics that aren’t the greatest. What happens if I get hit by a bus. What happens if my wife leaves me. And I have to split my share of the equity with her because now of a sudden you might be forced to be business partners with someone that like you do really want to be business partners with None of your employees x- ys because that’s what a lack of a marital jointer agreement might might provide for you.

25:12.14
David Siegel
Usually not I.

26:48.60
Matt DeCoursey
And but these are things that but they matter and they’re not fun to talk about. But so I gosh I Can’t believe how many people go into everything and it’s just only sunny day provisions. But these are the things that mature sophisticated business owners sit down and talk about with people. And I mean, I doubt I’m going to have a hard time getting an attorney to agree with the the need for the rainy day clauses because you see more of the rainy day stuff then because if it’s sunny and everything’s Happy. You’re not calling the lawyer.

26:29.38
David Siegel
Well it goes it goes ah a step further than that um to me contracts are mostly about raty issues. Um, the number of times I have spoken to clients who have said to me. Okay, we have a contract. Um.

28:08.80
Matt DeCoursey
Right.

27:06.72
David Siegel
Things were great and you look at the contract and what they were doing was not really what it quite says in the contract because they were doing what they kind of wanted to do because they were in sunny day mode and it really didn’t matter to them What the contract said it only really matters what the contract says when things go downhill people aren’t. Usually pointing to contract provisions when things are good.

29:17.40
Matt DeCoursey
Yeah, no I agree, and that’s and you know like I said it’s the rainy day stuff when everything’s falling apart now now look some the the sunny day can ah can come up too I’ve talked to man you know so we’re 900 episodes and five years later into this podcast and and for those of you listening.

28:21.44
David Siegel
Um, yeah.

29:54.68
Matt DeCoursey
These aren’t the only conversations I have on these topics because of this, I end up talking about this stuff to people all the time like all day every day but the the sunny day provisions can become an issue too because once all,, right? So you mentioned all right. You don’t have any money We don’t have any traction. We don’t have any revenue. And that means that you don’t have much of a business and it’s probably not worth a whole lot but a lot of people run into issues later when things are worth something, and now the people are like Well what do you mean? I only get 1%

29:36.14
David Siegel
Um, ah true.

31:02.20
Matt DeCoursey
You know? and and so the the sunny. Yeah, the sunny day things can come up too or the another thing too is there’s nothing there. There are very few things that are less liquid than ownership in your nonpublicly traded startup.

30:04.66
David Siegel
That is that is very true. Um it. It’s not only um, Ill liquidquid because there isn’t a market for it. It’s illiquid because probably. There are contractual visions stopping you from selling it Even if you wanted to and had a buyer. Ah right? Guy itre of people. Yeah.

32:00.80
Matt DeCoursey
Not to mention the difficulty of trying to find a buyer and making sure that they can’t actually buy it because you’re you can only these you can’t sell it to certain types of people. What happened? Yeah, anyway, this is probably a good reason to Suggest. Ah, couple of things. Well if you’re wanting to get into the deep complexity of this Stuff. You might want to click the link in the show notes for Http://grelas.com or http://universalregisteredagents.com who helped with some of the basic setups of. Ah, different stuff and you know setting up a new business and maintaining compliance isn’t easy. That’s why it’s important to have expert help along the way That’s exactly what you’ll find at http://universalregisteredagents.com. All your business setup and maintenance needs they can help you set up an lllc corporation or nonprofits wherever you’re located. In addition, they can also help with registered agent service. A wide variety of corporate services as well as meeting the needs of independent contractors. Um, yeah I had the guy That’s the the founder and owner of universal registered agents On. And yeah I asked him. Do you do all these things he said no actually.

32:29.20
David Siegel
Um, yeah.

34:08.88
Matt DeCoursey
A lot of times attorneys like Grelis or whoever might not want to do these basic mundane setups and they work with companies like yours a lot in a tandem way to get the needs right for hyperspace like you’re in Cupertino these things are a lot more inherently thought out and planned in California where Silicon Valley exists

32:51.76
David Siegel
Yeah, 5

33:08.14
David Siegel
Yeah.

33:20.29
David Siegel
Um, yeah, that’s true.

34:48.38
Matt DeCoursey
Then they might be in Idaho where it doesn’t hasn’t really come up a lot so you look at like the diversity of of blending different legal teams and and and people in now is one thing I think it’s important to remember is if you own a business already and it’s already set up. You can still make some of these fundamental changes and prepare for growth and then some are a lot harder to roll out if you’ve already got them in hand.

34:13.70
David Siegel
Yeah, and so a couple of things there I mean one is I I fully agree about using services like theirs for None reasons. None of all, yes, this is all hyper-specific and and and we’re talking about employment issues, in particular, those are. It’s you’re stuck generally with the law of where your service provider is so as we get into a more remote world. Um, the compliance complexity is you know.

36:26.54
Matt DeCoursey
Yeah, yeah.

36:41.44
Matt DeCoursey
That that and that’s a great point man. Yeah, what? what? or what? Ah what about my 270 employees in the Philippines where people off it what you took.

35:21.80
David Siegel
Who know if if you’re somebody in Idaho oh it’s Idaho law if they’re in California it’s California. Yeah.

35:41.46
David Siegel
That’s even yes, yeah.

37:08.16
Matt DeCoursey
You talk about diligence and and stuff like that I talk to people all the time I’m not going to name my competitors but some of these freelance marketplaces that are out there. What kind of intellectual property assurance. Do you have and like some of that and those are the problems we solve at our business is making it easy to hire someone in the Philippines.

36:06.90
David Siegel
Um, okay.

36:18.72
David Siegel
Right.

37:46.16
Matt DeCoursey
And and and also from a basic human level make sure that that person works for a company with a good culture has health benefits equipment like you know we do team building activities for our clients teams and all these different stuff and and then another thing is are you do you actually have recourse.

36:56.78
David Siegel
Um, right? you know.

38:24.24
Matt DeCoursey
You know, like if you’re going to hire someone in Bangladesh. That’s a 1 ne-off-hire in a freelancer marketplace if you think that that marketplace is going to give a shit when you have an IP problem later they won’t they won’t so like those are the kind of problems that we solve and they’re done with.

37:19.26
David Siegel
Not a chance right.

38:58.52
Matt DeCoursey
Everything we’re talking about today. We have a very refined new hire process that involves levels of vetting like None different security and background checks like a whole lot of different stuff including actual enforceable contracts with our employees. That do things like backup our and ndas our intellectual property agreements and stuff like that and and you know you don’t have the stuff in place and someone runs off with all your shit. Don’t complain to me about it.

38:32.64
David Siegel
It’s right and that that’s very true and you know I have a lot of clients who who want to hire people outside the United States for various reasons and um, you can’t just take ah, there’s 2 sides you can’t just take a US-based

40:15.12
Matt DeCoursey
You.

39:05.88
David Siegel
Ip Assignment and confidentiality agreement and you know use it in every country in the world that doesn’t work so on a legal end but you’re entirely right? practically speaking. Um, you know what do you do? if they violate the contract if you just go find someone on Upwork or something like that. Um, you know, if you don’t have someone standing behind it What good or these contracts. Yeah.

41:19.82
Matt DeCoursey
Right? right? And that’s the thing is so don’t don’t fool yourself into thinking that if you have someone sorry China but if you have someone in China and they run off. Ah your IP that if you show up, China doesn’t care.

40:20.30
David Siegel
Oh Lord God I know I know they they will it? Yes, Ah, but.

41:49.98
Matt DeCoursey
They don’t care. They don’t give a shit they will laugh you out the door. They’ll say go home so you don’t have any support and then you look at countries like the Philippines who are set up to support the export of labor. The online nature of that. And are a lot more friendly and we’ll give you some help but at the same time like we’ve even realized like you’re still a foreigner there. So yeah, oh my my my David we get to talk to that’s see you all you get to deal with the United States I’m like trying to move into other countries too. It’s ah this.

41:13.22
David Siegel
Um, right? This Christmas. You have been exactly.

43:03.60
Matt DeCoursey
There’s a lot you got to really understand a lot of it. Okay, so when and we’ve talked a little bit. Okay, so we know we got to get a setup. We got to get some things that we could probably go on for like 5 more episodes about the details of these things. So I think the important thing for those of you listening is to find a good.

41:56.98
David Siegel
Forever. Yes.

43:37.80
Matt DeCoursey
Legal provider and find people are going to give you good advice. There’s nothing wrong with having a little more information and an agreement then now normally I’m a brevity guy I’ve kind of as I’ve gotten older I’m like okay, let’s get less words but these are things that that are good now.

42:31.90
David Siegel
Um, right? yes.

44:07.96
Matt DeCoursey
You mentioned earlier, so and I and I’m going to I already pivoted the title of this, which we were talking about new the new navigating the new hire process I’ve added the 2 words for startups here because we quickly started talking about like payment for equity. There’s you know there’s that’s an issue and.

43:05.20
David Siegel
Yeah.

44:47.34
Matt DeCoursey
I have told so many people they’re they’re they’re like well I want to give someone equity would you give I gave him 40% well what’s the replacement value on that. Ah you know could you have hired someone anywhere and saved a lot of your equity and then what provisions do you have in there like is it vast does it define. What.

43:35.74
David Siegel
Yeah, oh Lord god.

45:26.32
Matt DeCoursey
Defines reasonable participation or any of that. So if you have to go that route. What’s a good way to bring someone in should they be an employee right away or if you’re doing like a little short term thing at what point you realize that oh I got to make this person employee.

44:34.60
David Siegel
So this depends so when you’re dealing with employment law in the United States it depends what state you’re in um, just to make things slightly more complicated. There’s federal law on top of that and whichever is stricter applies. And helpfully, some states have their own laws that are weaker than federal law for no apparent reason because the federal law then applies. So. It’s a little bit weird. But um, the temper depending on the state. The temporary nature of work is a relevant factor in whether someone’s. Employee, you’re an independent contractor, but there are a number of states where that’s not even relevant. Um, and so California being one and ah that somebody is only working for a few months is not even a relevant factor in determining if they’re an employee you’re not um and.

47:43.20
Matt DeCoursey
When are they an employee when they start doing work for you.

46:28.50
David Siegel
Um, yes, as long as the California uses a test called the ABC test to determine if someone’s an employee. It’s not it wasn’t developed by California. It’s fairly new in California it was developed in other states. So there are other states for example on the East Coast that have the same test. Um, and. Under that test. You’re an employee if the work that you’re if you’re essentially not particularly under the control. Sorry you’re not an employee I’m sorry if you if all 3 of these things are true. You’re not under the control of the hiring entity. To a significant extent, so you can kind of do things independently, um number 2 the work you’re doing is not part of the general work of the entity that you’re working for and number 3 you’re actively involved independently in. Providing these services to other entities. So um, nothing in there. You’re in the business of being a contract exactly so um, yes, that’s a very good example. Exactly.

49:45.22
Matt DeCoursey
Mean meaning you’re in them but you’re in the business of being a contractor, right? but with what so if you look you look at my company which we’re in the business of doing that. That’s a good example. Yeah. And then another thing too well and that well then because I get the one of the common questions we get when we bring in new clients is this ah well do I have this their tax. No these aren’t no because these are not employed. These aren’t people that are doing work in the United States now

49:12.20
David Siegel
Right? right? And and that is None big cost issue between an employee and a contractor in The United States do you and so for an employee you’re paying you have withholding obligations which is not your money. But. Um, you have payroll tax obligations. You have to pay employer side payroll taxes for employees. You do not pay that for independent contractors. Um.

51:23.26
Matt DeCoursey
Yep, which is a good a man and a big reason that a lot of people let me just make you a contractor. Yeah.

50:07.92
David Siegel
Right? And I and and I would be remiss in not pointing this one little tidbit out. This is the one area of law where as important as contracts are having a document signed by the service provider saying they’re an independent contractor. It is nice but it is not determinative of whether somebody is an Independent Contractor. You can’t contract that.

52:10.80
Matt DeCoursey
Right? right? Yeah and I agree on it. Well I think a lot of people do this too. They’re they’re like well, let me bring this person in as a quote contractor for a month or two because I’m want to make sure it goes well, that’s an employee. Yeah, that’s an employee. Yep.

51:05.14
David Siegel
Yeah, right? Yeah, it Very yeah, exactly that is that that is pretty typically an employee but so let’s say you’re giving these for this video. Whatever you end up with you’re giving somebody Equity. You can give an employee equity. It’s not a sub. For cash compensation for an independent Contractor. You can do whatever it is you want so you can give them equity as their only compensation. Um, the important thing. Yes, you bring up the idea of vesting. Um that is. Critical anytime you hire someone to have their equity whether it shares or options vest over time so that they are incentivized or they have to stay with you and provide services to actually get equity and you know typically as part of a vesting arrangement. You’d have some sort of. Cliff some period of time where they don’t vest at all that way you have I mean usually it’s a year. Um, but sometimes with independent contractors. It’s much shorter. Um, but.

54:18.98
Matt DeCoursey
Yeah, well and the reason you do that is because if people fizzle out right? away you don’t want a shitload of people on your cap table that own point None one that they picked up because they were there for the two months that they.

53:19.64
David Siegel
Exactly that’s right exactly? Um, so you know so None things None yes, vesting cliff. Absolutely.

54:56.94
Matt DeCoursey
Grossly failed and got fired. Yeah yeah.

53:56.84
David Siegel
You know, highly advisable. Um I’ve never heard of somebody regretting doing that. Um and then the amount of equity I mean you do um equity is in many ways, a finite pool. As much as you can, you know, continue granting and authorizing more shares you you can’t like dilute people you know do targeted dilutions of certain people. You can’t just do that. So um, the important thing is just to think a think long term. In terms of equity. Don’t just start granting percentages because you think you should do it or someone ask for it think over the next year or None think what you know your next round. What things will look like and then do some market There’s a lot of resources out there about what’s market you know over time for different positions.

56:59.34
Matt DeCoursey
You know I’ve had a I I had a past guest that has a website called slicing http://pie.com and I have have you seen it have you seen it before.

55:41.36
David Siegel
Depending on where you’re at with the company.

55:51.50
David Siegel
Um, ah yeah I’ve heard bit. Yeah I’ve seen it. Yeah.

57:26.34
Matt DeCoursey
So None off, thanks! Thanks Mike for building this I have no vested interest and and telling you to go there I thought it was super cool like I did I was recording the episode with them and I said man. Thank you so much for making this because it actually does kind of track and like you know it. So when you hear the term sweat equity.

56:42.26
David Siegel
Um, yeah.

58:05.14
Matt DeCoursey
How much sweat man how many drops how many days how many hours how many months how many Milestones these are the things that you need to think about because if you don’t you can get down the road and people are like what do you mean? I don’t get my shares, or if you don’t define what it is that you’re trying to do or accomplish or. Any of that then well, that’s the gray area that that lawyers make a living off of on many days, and there’s so many more that make it on making sure the gray area doesn’t exist. Yeah.

57:27.80
David Siegel
They do and the last the is Stolen Many yeah, The last thing you want of the last thing you want is a cloud over your capitalization. How manyche who owns what shares if you want a disaster for your company that would be. The biggest disaster pretty much that I can think of um because people will not want to invest in your company if they don’t know who owns it.

59:47.48
Matt DeCoursey
You’re true and I want to I actually thank you for bringing that up because I’m going to go back to like minute 4 of this somewhere and by the way I’m probably inaccurate about that so somewhere in the beginning you mentioned the diligence process and how not having properly defined who an employee is and and.

58:32.20
David Siegel
Um, yeah, yeah, um, yeah.

01:00:20.80
Matt DeCoursey
And all of that. Let’s I want to talk about that for a None like what what is specifically what it is in the diligence process that gets offended.

59:05.76
David Siegel
Isn’t.

01:00:43.48
Matt DeCoursey
You know, like ah here you are I got the funding and now I got to go through diligence and this murkiness exists around the relationship with our employees like can you define that a little more and explain like what it is that that goes wrong there.

59:42.90
David Siegel
Yeah, so you know when you go through diligence, whether this be a funding round or or M and a um, you will have a team of lawyers looking through a list of every person that you have had provide services. Look at the contracts that you had Hopefully there are contracts if you know and they’re looking for all sorts of things mind you, they’re They’re not just looking for labor law compliance they’re looking for Ip issues. They’re looking for equity related issues. Um, but on the on the.

01:02:05.78
Matt DeCoursey
Yep.

01:00:51.76
David Siegel
Labor law side of things employment law side of things they’re going to ask you to justify why someone has a contractor agreement when clearly you know you’re a you know a saas startup and you hire a programmer to do your you know some. You know, database work for you or some front end work which is clearly a part of what you do um and if your only justification is they signed a consulting agreement or something like that. That’s you know it’s not going to pass muster now mind you when I say not pass muster in a. Diligence in a funding round, particularly none funding round investors are expecting these mistakes. Um, and there can be more interested in making sure they’re not made in the future. But in m and a it’s the diligence is much heavier and. They’re going to likely require the stockholders of the of the your company to agree to indemnify them. You know out of your pocket if there’s any problems. Um. And who wants to have that on their you know over their head for the next few years after an acquisition that they may have to give money back? Um, but um, as I said, you know in the in the diligence process if you’re doing your first funding round. You know it’s unless there’s huge egregious problems.

01:04:51.64
Matt DeCoursey
Boom.

01:03:54.40
David Siegel
If it’s just kind of the standard. You know you hired a couple of people at the beginning as contractors, and they really weren’t, but you’re transitioning of them over to being employees. That’s probably not going to stop someone from investing at that stage later on it’ll be a bigger issue.

01:05:48.80
Matt DeCoursey
With me again again with me today is David Siegel and David’s a partner at Grelis Shaw law firm and you can go to grellis is grellasdotcom I would imagine you get a lot of exposure to a lot of interesting things. Ah out there in Cupertino they’re I’ve always been very happy that people in that region have that they seem to. Think with a founder first mentality if you’ve ever looked at like what a safe agreement essay fe simple agreement for future equity that is a very simple straightforward thing. That’s really founder friendly created by ah that was given birth to in your area. Maybe you invented it I don’t know.

01:05:27.40
David Siegel
Um, yeah.

01:05:54.80
David Siegel
No, not me actually.

01:07:22.28
Matt DeCoursey
But there’s a lot hey hey took a shot. It would have been great if you’re like yes we were the first person I would been like wow that was supernatural but you but you don’t need a lot. You don’t need to be supernatural to. Find the things out there that are work. There’s a lot of different vessels and a lot of different products. A lot of different opinions and some of these things make a lot of sense. Um I I you know so I just just recently had a birthday and it always makes me reflect about so many different things and. I do things completely differently now than I might have fifteen years ago in my book Million dollar bedroom I talk about undoing the the ball of rubber bands. It is so much easier to not create the ball of rubber bands because if you have to stop and and.

01:07:03.76
David Siegel
Friday.

01:07:14.47
David Siegel
Um.

01:08:56.42
Matt DeCoursey
I’ve had oh man at 47 years old I’ve done different businesses and I’ve you know worked hard with so many other people to make them successful. But I’ve had some borderline horror stories.

01:07:57.34
David Siegel
Books Yeah economic.

01:09:24.40
Matt DeCoursey
Mainly related to having to stop what we were doing or things that stifled growth, why we had to stop and undo the ball of rubber bands. So but I know that you got you can’t go too far into it. But what’s what’s a situation where someone could create that ball of rubber bands and be forced to stop what they’re doing like.

01:08:10.63
David Siegel
From writing.

01:08:37.60
David Siegel
I tell a story that yeah I yeah was it was.

01:10:03.34
Matt DeCoursey
Whether whether you have to tell whether you tell a story and don’t name those involved. Ah, for whatever reason, But what? what’s ah, let’s give like a kind of a practical example and I’ll lead so I used to own a ticket brokerage and. And it grew really quickly, and at one point I was really co-mingled, meaning my personal finances were involved in the business finances. It started as kind of a side hustle and at one point I had to be We had to basically stop all all all purchasing.

01:09:09.58
David Siegel
Building correct. We didn’t want more building.

01:09:36.96
David Siegel
For Exemp Oh God So no that his course is yeah.

01:11:00.84
Matt DeCoursey
For ten days which might not sound like a long period. But for us that was forever and we had to go back and kind of separate everything and we still were able to sell stuff but in that type of business buying and selling are a key ingredient of all of it.

01:10:05.10
David Siegel
Sure it has felt slightly.

01:11:32.00
Matt DeCoursey
But we had to stop piling on purchase orders and other stuff like that until we went back and straightened out like None of transactions. You know that was a long time ago and I learned a lot from it. But you know that’s the kind of stuff that you’re looking at is if you eventually it’s very difficult to change the tires on a car.

01:10:47.42
David Siegel
Oh you that is true. Um, yeah, I mean the the repeated example of where I see businesses imploding um from sort of a personnel side of things.

01:12:12.80
Matt DeCoursey
That’s ah, driving on the highway. Yeah.

01:11:26.94
David Siegel
Um, is the deadlock situation which is kind of tangential to our conversation but it it is 1 to keep in mind as people are bringing on new partners to a business is are you creating a setup that has a potential for or a significant potential for deadlock.

01:13:26.56
Matt DeCoursey
But defined defined I Know what you mean but Define deadlock for the listeners.

01:12:07.30
David Siegel
Amongst the the decision-makers. Yeah yeah, the classic example would be None people getting into business together, and they both are none owners with no control, and any decision requires a unanimous consent. Um, but it’s not the. Only way to get to that there are others. There are all sorts of structures and I see companies that decide to set up structures that have these veto points that um make it um you. Impracticable or impossible for the business to go forward if there’s a falling out. Um and um, more often than not those situations. that’s the that’s the most ah um those are the most repeated examples of failure that I see that are. Um, agnostic as to what the underlying talents are or products are things like that. Um, but from an employment perspective. You know there are states California being one but not the only that um, certain employment law. Um violations. Um. The owners of the business can be personally liable, and that’s an that’s an area that I think people should be aware of if you know if you’re giving California’s example that you know I deal with a lot you know, um, the managing people at a company are personally liable for a nonpayment of minimum wage and. You know when I say nonpay a minimum wage if you hire somebody as an independent contractor who should have been an employee and you’re not paying them at least minimum wage, then you’ve violated minimum wage laws and um, they can sue you personally for that.

01:17:07.34
Matt DeCoursey
Which which are rare instance which are rare instances of piercing the veil as I believe is the term for that of the protections that you may be afforded So don’t fool yourself into believing that incorporating or being an lllc or having a separate entity.

01:15:48.00
David Siegel
And I’ve had So yes that yes, exactly. So.

01:17:40.80
Matt DeCoursey
It doesn’t mean you can do improper shit. Yeah.

01:16:20.60
David Siegel
Right? that? Yeah I mean people focus on I mean there’s piercing the corporate veil. Um, but there there are other exceptions where you can be personally liable, this being one of them and I we had a client who we came to us because they were. In this situation and we had to negotiate something and they had to take out a second mortgage I mean it was you know a horrible situation for them and you know the company survived it. But um, there’s no,, There’s no undoing that at that point. Yeah.

01:18:47.94
Matt DeCoursey
Yeah, and that and that piercing the veil thing and maybe that is that my most professional statement of that is just if you do improper shit or whatever. That’s there you go. That’s the episode quote for what we’ll put um name. Whatever.

01:17:50.78
David Siegel
That is the yes that is yes if you.

01:19:22.80
Matt DeCoursey
It might be It might be It might be the most accurate on some levels now so you know thank thank you so much for joining me once again, a big thanks to today’s episode sponsor universal registered agents. There’s a link in the show notes where you can learn more about their business, set up your new business, and maintain all aspects of your business compliance. Their goal is to make your job easier. So you can focus on what you do best which is running your business. You can connect with them by visiting the link in the show notes you can also use the show notes to learn more about David Siegel or Http://contactgrelis.com now in regards to their firm. They specialize in startup technology and venture law practice, and this is a specialty, and I want to actually when I’m speaking are you are you a founder of grelis right? So we will forego what I often call the founders freestyle.

01:19:31.50
David Siegel
No I’m I’m not a founder. Regardless.

01:21:09.78
Matt DeCoursey
But here there’s there’s ah something important that I think that matters and so I’m not an attorney and I and anything I said in this episode is should not be constituted as legal advice there you go I learned that one a long time ago now.

01:19:58.80
David Siegel
You.

01:21:43.34
Matt DeCoursey
But that’s an important thing you’re going to hear a lot of stuff from a lot of people and I just speak for my own experience. But I’m the None person to understand that I’m not an attorney and with that with matters related to this or your startup at the setup I think it’s really really important. Okay, so http://universalregisteredagents.com will be the none people to tell you that they don’t know about things like equity sharing agreements and a lot of this other crap. That’s not what they do go find a specialist like Grellas Shah that understands local national and bigger picture implications when it comes to this because. You don’t want to have to undo the ball or rubber bands later.

01:21:37.98
David Siegel
Yeah, and None thing I would say is um, lawyers have value. But if you’re a startup, you can’t spend all your money on legal fees. So um, pick the right things. That’s what you know universal registered agents. Being example, that’s you know. There are things they can do much cheaply more cheaply than a lawyer can do and save your bonds. Yeah, exactly called. That’s exactly.

01:23:38.88
Matt DeCoursey
They specialize in it. It’s kind of like the idea of not processing your own payroll like call gusto go to http://gusto.com. They’ve been a past sponsor of Startup Hustle so many times but. These are things that there’s levels of efficiency and repetition that certain platforms or technology or people and I hear this a lot they’re like well I don’t want to call the attorney that guy charges me $500 an hour and I tell people the same thing every time you’re not paying for that hour you’re paying for all of the hours that led up to the one you’re paying for.

01:23:13.60
David Siegel
Yeah, led to it.

01:24:46.32
Matt DeCoursey
And within I’ve literally had 15 minutes so the None bill or whatever where I have saved None of thousands of dollars because that person that’s what you’re paying for. You’re paying for the past experience the wisdom, the input and the specificity if you have the right legal providers.

01:23:28.22
David Siegel
Um, yes, ah. Um, right.

01:25:24.50
Matt DeCoursey
Help you with what you want? what I’m trying to avoid is someone that specializes in immigration law writing your equity sharing agreement unless your cofounders coming from somewhere else and then maybe that I might be wrong about that.

01:24:09.84
David Siegel
Yeah yep, so.

01:24:20.56
David Siegel
So right after fair enough that’s serious.

01:25:51.94
Matt DeCoursey
So as we can as we conclude the episode today like what’s the I mean what’s the best advice you could give for startups that are hiring the you know that are navigating this process.

01:24:49.54
David Siegel
Yeah, I mean, the best advice I have for them is that, um, it’s hard to do everything right at the beginning. Um, if you know chances are everyone You are bringing on as a service provider is an employee by law I Mean that’s just the way it is. So at a minimum, if you have no funding and you have to consider people independent contractors understand the risk that you’re taking and doing that um transition them to being employees as soon as you do have funding. Um, and if there’s. Ah, separation, get a separation agreement um and be Respectful. You should always be respectful anyway. But this is be selfishly respectful so that you don’t, you know, convince someone to sue you.

01:27:52.80
Matt DeCoursey
Yeah, and I and just I like to come back with the real plane you know like I said I’m not an attorney you talk about a separation agreement like what does that mean and if I’ve done it in the past if someone worked for me for a while and then just either roles changed or whatever and they need to go. Ah, yeah I would continue to pay someone for a couple months some situations and not and you know don’t put people in desperate situations and they won’t do desperate things and some of that’s just as ah as a thanks for for participating for a while and some of it’s also just good business and.

01:27:07.82
David Siegel
Um, yes.

01:29:06.42
Matt DeCoursey
You know if no one wants to come work for a company that has a reputation of being hostile towards former current employees and these things are out there and it also sets a lot. It has a lot to do with your culture because if your existing employees see how shitty you are to the ones that.

01:27:54.74
David Siegel
Yes.

01:28:14.24
David Siegel
Here.

01:29:41.48
Matt DeCoursey
The ones that need to be cleared out. It’s not a good thing because what you’re going to find later is the way that people resigning is going to feel hostile in the beginning. You know they’re like I saw how you handled letting John or Jane go so here I am and I’m just saying I’m out.

01:28:32.16
David Siegel
Um, right? Yes, Yes, yeah.

01:30:15.62
Matt DeCoursey
And you know you’re going to run it. It just becomes a lot more problematic and really in the end if I like to say you know sometimes you have to free people up for their own future If you have the wrong people in the wrong roles and and you kind of owe it to yourself to make that change and you know, but.

01:29:10.70
David Siegel
Yeah.

01:30:53.46
Matt DeCoursey
The thing I Want to say in the end is you can think you have the loyal employees that love and support everything you do and they love you and all of it The moment you let them go. You are going to so you have a very very different situation most of the time meaning like I’ve had people that you know I shut down a business wants because we moved on and kind of this. You know, many many many years ago and I went from having people that loved me to a couple that hated me I’m like.

01:30:00.66
David Siegel
Okay, yes.

01:30:14.82
David Siegel
Right.

01:31:58.44
Matt DeCoursey
Didn’t short anyone out of something. It was just a change. It was disruptive for them and it creates resentment and you never know how people are going to act on the way out the door so you do have to kind of make sure that you take care of that, protect yourself too. But.

01:30:38.80
David Siegel
Just what happens in the world. Sometimes yeah yeah.

01:30:58.42
David Siegel
Exactly.

01:32:27.72
Matt DeCoursey
You know, I don’t know there’s been so many headlines you know what is it http://better.com fired like 900 people on a do call not professional, not the way to do it at all. Yes, yes.

01:31:10.76
David Siegel
Yeah, yeah, no, no every termination is a message to all of your other employees about how they’re going to be treated next. So keep that in mind.

01:33:04.94
Matt DeCoursey
I Can only imagine how many other employees quit right? after that which could have could have been part of their plan I don’t know but you look at the reputation loss and a lot of these So right now there’s all this.

01:31:49.92
David Siegel
Um, could have been. Yeah.

01:33:30.84
Matt DeCoursey
You know startups laying this off laying that off that if you read the articles you’ll see a lot of them in the fine print say you know they’re giving them 2 3 four months of a separation agreement because if you give people a bridge to get to what they’re doing next for most for the most part I find that there.

01:32:22.10
David Siegel
It would yet.

01:34:07.66
Matt DeCoursey
They’re respectful. They understand it but write a good agreement that says you know if you’re going to give something away. It’s okay to ask for something in return like you’re agreeing to this multi-month severance package where you’re going to do that. But I’m going to need you to agree to not go tell the world that you think I’m I’m a jerk.

01:32:49.24
David Siegel
Yeah, yeah.

01:33:09.90
David Siegel
Um, right right? that happens after yep.

01:34:41.60
Matt DeCoursey
Or or disparage it or whatever, and you’ll just be shocked at some of the petty stuff that people will do in life, which is why we have attorneys in courts and so and maybe social media who knows so.

01:33:39.28
David Siegel
You know that side of things. Yes.

01:35:13.56
Matt DeCoursey
David thank you so much for joining us and taking some time out of your day to chat with us once again, if you want to learn more about Grellas Shah. There’s a link in the show notes David I’ll catch up with you down the road hopefully not because I’m calling for needing help with what we talked about.

01:34:22.72
David Siegel
I Agree it’s been great talking to you as well.

01:35:52.28
Matt DeCoursey
Yeah, yeah.

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