By Ling Kong and Lara Shortz
Jack Dorsey’s recent decision to lay off 931 employees at Block underscores how swiftly mishandled workforce changes can spiral into significant legal and reputational crises.
For startups — whose attention is often intensely focused on innovation and fundraising — overlooking fundamental employment law responsibilities can become a costly oversight.
That said, the importance of embracing employment law essentials from inception cannot be overstated. Doing so helps startups manage growth responsibly, prevent legal pitfalls and position themselves for sustained success.
Navigating workforce reductions responsibly
As market conditions shift, startups inevitably confront tough staffing decisions. But terminations handled improperly can lead to severe consequences.
Mass layoffs trigger notification requirements under federal and state WARN Acts, and even smaller workplace reductions necessitate careful planning to avoid unintended discriminatory outcomes or wrongful termination claims.
Transparent, fair and well-documented termination processes protect startups from expensive litigation and preserve their integrity among investors and employees.
Structuring equity agreements clearly
Equity compensation remains a pivotal incentive for attracting talent, especially when cash flow is tight. According to Carta’s State of Startups 2024 report, reliance on equity grants continues to increase.
However, poorly constructed equity agreements often precipitate legal disputes. To mitigate these risks, founders should explicitly define vesting schedules, termination conditions, equity repurchase rights and option exercise windows.
Incorporating “bad leaver” clauses helps maintain clear capitalization tables by enabling companies to reclaim equity from employees leaving under unfavorable conditions.
Founders who fail to include detailed separation terms may resort to retroactively classifying terminations as “for cause,” leading to contentious litigation. Clearly articulated equity provisions from the start can preclude disputes, particularly during crucial phases like mergers, acquisitions or IPO preparations.
Ensuring compliance with compensation and classification
Startups often adopt creative compensation methods, such as equity or deferred payments, to attract talent. Although appealing, these carry significant legal risks. Employees classified as exempt must meet strict salary thresholds under the Fair Labor Standards Act. Paying solely through equity or deferred compensation risks violating wage-and-hour standards, potentially triggering enforcement actions and penalties.
Additionally, misclassifying employees as independent contractors can attract scrutiny from federal and state authorities, leading to substantial fines and legal challenges. Ensuring accurate classification aligned with federal and state laws is crucial for protecting a startup’s financial stability and legal compliance.
Managing restrictive covenants carefully
Noncompete and nonsolicitation agreements can effectively protect intellectual property and help to retain talent. Yet, enforceability varies across jurisdictions. States like California significantly restrict these agreements, while others require narrowly tailored provisions. As such, startups — particularly those with remote or hybrid teams — must avoid overly broad definitions, geographic and otherwise, which may be invalidated by courts.
Recent regulatory initiatives and legislative shifts further challenge broad restrictive covenants, viewing them as hindrances to innovation and labor mobility. Crafting agreements that specifically protect legitimate business interests can ensure enforceability and legal exposure.
Responding proactively to workplace allegations
Allegations of workplace misconduct or regulatory violations can emerge unexpectedly, presenting significant risks to startups. Ignoring or insufficiently addressing these claims exacerbates legal and reputational damage. Prompt, thorough internal investigations demonstrate proactive leadership and help mitigate risk exposure.
Also, reinforcing confidentiality and nondisclosure obligations when employees leave safeguards sensitive information. Actively reminding departing employees and future employers of these obligations further secures a company’s competitive advantage.
Preventing founder conflicts
Internal founder disputes are a frequently overlooked risk. Research indicates nearly half of early-stage companies experience significant founder disagreements within three years. Equal ownership structures often exacerbate decision-making paralysis. Establishing dispute-resolution mechanisms early — such as buy-sell provisions, arbitration or mediation — prevents destructive conflicts and ensures smoother operational continuity during critical milestones.
Strategic early investment in legal counsel
Startups typically view legal expenses as burdensome, especially in their early stages. Nevertheless, strategic early investments in employment and corporate counsel can meaningfully reduce long-term legal risks.
Early-stage legal guidance on employment contracts, equity structuring and termination practices helps safeguard company assets and supports compliant, stable growth.
Building a strong foundation
In the competitive startup landscape, attracting and retaining talent is critical. Founders who prioritize legally compliant employment practices alongside innovation establish robust, resilient businesses. By proactively addressing employment law essentials, startups avoid costly mistakes and secure their ability to thrive in the long term.
Ling Kong is a partner at Michelman & Robinson LLP, a national law firm with offices in Los Angeles, Irvine and San Francisco, California; Dallas and Houston, Texas; and Chicago and New York City. He has extensive experience advising emerging growth technology companies and investors, particularly those in the life sciences, consumer technology and real estate technology spaces.
Lara Shortz is Los Angeles Office managing partner at Michelman & Robinson LLP. Also the firm’s employment advice, counsel and executive disputes chair, she advises management regarding employment and labor law issues, including state and federal employment acts, hiring, firing, discrimination, harassment, and wage and hour compliance. In addition, Shortz handles executive employment contract disputes and conducts workplace training, investigations and compliance.
Illustration: Dom Guzman
Stay up to date with recent funding rounds, acquisitions, and more with the
Crunchbase Daily.
