1 Table of contents 18

Top 10 Steps for Tech Startups

10 STEPS FOR		1
BUILT-TO-SELL TECH STARTUPS		1
to Lock Down Employment Law Compliance		1
PREPARED BY		1
YOU’VE BUILT A GREAT PRODUCT, ASSEMBLED A TALENTED TEAM, AND MAYBE EVEN CAUGHT THE ATTENTION OF INVESTORS OR POTENTIAL BUYERS.		3
But your code or growth metrics will only get you so far if your company is not a compliant acquisition-ready business – and your compliance with workplace laws plays a major role in that.		3
This guide will walk you through a non-exhaustive list of employment law best practices every startup founder should implement before you begin to position your company for a streamlined acquisition.		3
BRETT OWENS		3
DANIELLE H. MOORE		3
KEIA JAMES ATKINSON		3
CLASSIFY WORKERS CORRECTLY: EMPLOYEES VS. INDEPENDENT CONTRACTORS		4
Best Practices		4
Provide W-2s for employees and 1099s for properly classified contractors.		4
ENSURE OFFER LETTERS AND AGREEMENTS ARE CLEAR AND LEGALLY SOUND		5
Best Practices		5
MAINTAIN COMPLIANT PAYROLL AND WAGE PRACTICES		6
Best Practices		6
DOCUMENT YOUR EQUITY GRANTS AND MAKE SURE THEY’RE CAP TABLE-READY		7
Unclear or undocumented equity promises can derail M&A deals and dilute your equity.		7
Best Practices		7
PROTECT COMPANY IP AND TRADE SECRETS		8
Best Practices		8
DEVELOP PROACTIVE DISPUTE RESOLUTION AND RISK- REDUCTION POLICIES		9
Best Practices		9
IMPLEMENT BASIC HR INFRASTRUCTURE EARLY		10
Investors want to see a scalable, professional operation, and performance management practices.		10
Best Practices		10
BE PREPARED FOR EMPLOYMENT- AND BENEFITS-RELATED DUE DILIGENCE REQUESTS		11
Best Practices		11
AVOID “FOUNDERS FIRST” COMPENSATION STRUCTURES		12
Best Practices		12
PLAN FOR CLEAN EMPLOYEE TRANSITIONS POST-ACQUISITION		13
Buyers want to retain key talent without inheriting problems.		13
Best Practices		13
Bonus Section		14
UNDERSTAND THE “GOLDEN PARACHUTE” RULES AS EARLY AS POSSIBLE		14
Golden Parachute Rules The rules under Section 280G are extremely complex, but, in a nutshell:		14
They apply when “disqualified individuals” – certain officers, shareholders, or highly-compensated employees – may become entitled to certain “parachute payments” that are contingent on a change in ownership or effective control of the company making the payment (if the company is a C corporation, whether public or private).		14
When these rules apply, the individuals receiving those payments must pay a 20% excise tax on any “excess parachute payment” – and the corporation making those payments is banned from taking a tax deduction for that amount. In addition, buyers will absolutely care about potential 280G liability, and these issues can impact or even hold up the deal.		14
The “excess parachute payment” amount, if any, depends on how much the parachute payments exceed the individuals “base amount,” which is essentially their average includible compensation over a 5-year base period.		14
The reason these rules can be even harsher for “built to sell” tech startups is because founders and other key players often take low salaries (or even none at all) during that 5-year base period – and a low base amount makes it much easier for parachute payments to exceed the 280G threshold (3x the base amount) and increases the size of the excess parachute payment (and therefore the amount of the excise tax and deduction loss).		14
The good news for private C corps is that the excise tax and deduction allowance that would otherwise apply can be completely avoided by meeting the requirements of the “shareholder approval” exception. However, this involves a somewhat risky, and sometimes contentious, process.		14
Best Practices		15
CONCLUSION		16
Make sure you are subscribed to Fisher Phillips’ Insight System to receive the latest content relevant to your tech business. If you have questions about employment compliance or preparing your startup for acquisition, please feel free to contact your Fisher Phillips attorney, or any attorney on our Tech Industry Team or M&A Practice Group for strategic guidance tailored to your stage and industry.		16
BRETT OWENS		16
DANIELLE H. MOORE		16
KEIA JAMES ATKINSON		16

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