start-ups

October 5, 2025

Five Costly Legal Mistakes California Startups Should Avoid With Their Employees

Some of the most common legal mistakes that California tech startups and other small employers make with their employees are also the easiest to avoid:

Terminating an employee without consulting an attorney about the circumstances of that termination. Just because you believe that you have valid reasons for terminating an employee, who also happened to be “at will”, doesn’t mean that the same employee won’t be able to make it look like he was fired for an unlawful reason. Suppose you fire someone for poor performance, but that employee happened to complain about sexual harassment, or he filed a workers compensation claim just a few weeks or even a few days earlier. Will you be able to show, given this suspect timing, that the true reason for termination was in fact his performance, and it wasn’t retaliation? Or suppose you lay off a minority employee due to your changing needs or budget issues, but then just a couple of weeks later you get a new (and unexpected) round of funding and you post the same position back on Linkedin and end up hiring a white employee. Will that laid off employee come back and claim racial discrimination? These are just a few random examples of how a seemingly just termination can look less than entirely lawful. Consulting a reputable employment lawyer about your termination decisions before making that decision can make a difference between having a clean break-up with the employee in question v dealing with the stress, the expense, and the hassle of litigation. Remember – what matters is not what actually happened from your perspective, but what the employee can prove happened or most likely happened given all the surrounding circumstances.
Misclassifying an employee as exempt v hourly. To be salaried and exempt from overtime pay in California, your employee has to satisfy very specific requirements. In the context of tech start-ups, the most common exemption is an executive / managerial exemption. However, just because you label someone at your company as a manager, doesn’t mean that that employee is correctly classified as exempt, unless over half of his job duties actually involve managerial work. This type of misclassification can be particularly costly, if that employee frequently works more than 8 hours per day without being paid overtime, which is very common in start-ups, and who will later be able to claim that he worked hundreds of fifteen-hour days for which he wasn’t paid correctly.

April 1, 2017

A Mistake To Avoid In Employee Compensation At Sart-Ups

by Arkady Itkin

It’s common for start-ups in the Bay Area that are low on funding to compensate their employees by granting equity only and without providing any actual salary or hourly pay. This is a mistake that entitles any such employee in California to make a claim for unpaid wages, interest, and possibly penalties. Many start-up owners assume that just because they themselves are only compensated with equity, and their company doesn’t have the money to pay their employees, it’s fair to pay their employees with stock options only. It might or might not be the fair thing to do, but in California it’s definitely not legal.

California labor code is very clear on this – an employee should be paid for every hour of work. Stock options are not pay because they don’t have have immediate (liquid) value. The law does not exempt employers from paying wages to their employees just because they don’t have the money to pay or just because the owner doesn’t draw salary, so this is not a valid defense in a potential claim or a lawsuit for unpaid wages.

Although laws in other states allows company not to pay those employees who who hold a certain % of ownership / stock in the company, this is not the case in California – at least not yet. Therefore, start-ups should at least pay their employees minimum wage to avoid liability for non-payment of wages, regardless of whether these employees also receive stock options.

September 24, 2016

Being Laid Off And The Right to Stock Options

by Arkady Itkin

One of the more painful things that happen to employees of start-ups in San Francisco and the rest of Silicon Valley is being laid off shortly before or right before they become eligible for a stock or right before an important vesting deadline. Sometimes, employers terminate an employee specifically for that reason – to avoid giving them these stock rights. As unfair as this type of action may sound, usually it’s perfectly legal. Most stock agreements are written in a way that does not create a binding contract. These agreement allow employers to do this lawfully, and there is not much that the terminated employee can do to not lose the stock he was looking forward to receiving.

However, this loss of stock can often be used in negotiating a severance or a better severance packager, especially if an employee is terminated days before his stocks vest, which is not uncommon. Different strategies are appropriate for negotiating a severance depending on the length of your tenure with the company, your most recent position, duties and compensation, any potential legal claims you might have against the employer, and other specific circumstances of your employment and termination.

An experienced employment attorney can guide you through how to go about negotiating a higher severance and getting the best deal you can, as you transition to your next job or the next stage in your career. Negotiating a higher severance is always a good idea for a simple reason – you have nothing to lose, and if a 10 minute conversation can result in putting a few more thousand dollars in your pocket, then why not try.