When starting a new job, we typically think about two things: our role and our compensation. But there’s so much more to consider, especially for startups.

In a recent episode of the Founder Shares podcast with Ashley K. Pittman, employment law attorney at Hutchison, we dug a little deeper into the life cycle of the relationship between an employer and their employees. From independent contractors to full-time employees, there are a lot of different considerations for founders as they fill roles in their companies.

While new startup employees need to look for people who believe in the business’s products or services, they also need to find people who believe in the founder. From there, founders have to figure out exactly how to classify their new hire within their company.

“I’ve found that the main thing that drives that decision for founders is ‘I don't have cash to pay them a salary or wages,’” Ashley said, “so they're a contractor, and I'm paying them in stock options. That's fine as long as the relationship actually is that of a contractor.”

And there are different rules for different classifications of employees, and the consequences for not following them can be expensive.

“If you classify someone as an independent contractor and pay them only in equity because you don't have any cash yet,” Ashley said, “and then it turns out they were misclassified and they were actually an employee, they could be entitled to back pay, back wages, potentially benefits if that was something you were offering to actual employees.”

While Ashley said it’s unlikely for founders to find themselves in that situation at the early stages of their business, it’s a mistake that can open them up to personal liability later on, and it’s important to take the steps to protect yourself early on, to talk through these issues and the plan to avoid them.

“It's much better to have had these conversations—and something in writing—up front, and pay those legal fees,” Ashley said, “than to have to pay way more in legal fees to fix it later.”

Fortunately, there are affordable options out there. At Hutchison, we offer billing arrangements for early-stage companies, and there are some online solutions to help, too, but even a 30-minute call with an attorney can help you avoid a major mistake.

Avoiding these mistakes doesn’t just help your run with the company run go more smoothly, it can also help the acquisition process. It makes the due diligence process that much easier.

“Just generally, has the company received employment claims?” Ashley said. “Have there been disputes? Have we gotten demand letters from attorneys? It's nice to have stuff. Are there any terminated employees? Did they sign releases and get severance when they left? Is there a thorough employee handbook?”

Overall, Ashley says there are a lot of misconceptions about employment law, and she dispels many of them in this podcast episode. 

Click here for Podcast.