Onboarding for Service Providers at Early-Stage Companies

• 10.26.2023
• Gary Schall, Daniel Zimmermann

This blog post was co-authored by Giancarlos Rodriguez.

For startups and early-stage companies, the onboarding of service providers is both a strategic necessity and a legal challenge. In this blog post, we will discuss the key considerations, best practices and other valuable insights in the onboarding process that can help founders avoid common pitfalls.

Non-Disclosure Agreement

A Non-Disclosure Agreement (NDA), also known as a confidentiality agreement, is a legally binding contract that establishes a confidential relationship between two or more parties. Its primary purpose is to protect sensitive proprietary information and prevent it from being disclosed to or used by unauthorized individuals or entities. Key elements of an NDA include but are not limited to: (i) definition of confidential information; (ii) obligations of the parties; (iii) duration of confidentiality; (iv) permitted disclosures; (v) consequences of breach; and (vi) governing law and dispute resolution. Note that the specific terms of an NDA can vary based on the parties’ needs and the nature of the confidential information being shared.

When pursuing a new hire, it is recommended to sign the NDA prior to discussions if the company anticipates disclosing proprietary information throughout the course of the hiring process. For example, if you are an early-stage life sciences company looking to hire an individual to lead the company’s strategic regulatory development you may have to disclose certain proprietary information to the potential hire. If a company does not share proprietary information through the interview process, then it can rely on the Inventions and Non-Disclosure Agreement that is discussed below.

Offer Letter

Once a company has selected a candidate, the company should provide the candidate a formal written document known as an “Offer Letter” to sign and return. The purpose of the Offer Letter is to outline the terms and conditions of employment. Key elements include but are not limited to: (i) details of the role and responsibilities; (ii) salary, bonus and if applicable, equity compensation; (iii) benefits; (iv) type of employment (i.e. full-time, part-time, temporary, etc.); (v) employment is at-will; (vi) conditions to be satisfied prior to start of employment, such as background checks and reference checks; and (vii) if applicable, severance (which is usually seen with executive hires). Depending on where the candidate and the company are located, the candidate may also be asked to sign an agreement where he or she agrees not to compete with the company and not solicit employees of the company for other employment while employed and for a period of time after the employment relationship ends.  You should always check with employment counsel prior to asking a candidate to sign such an agreement as part of the onboarding process as state laws vary on these types of provisions and non-compliance could be costly.  In sum, a properly drafted Offer Letter establishes clear expectations for both parties and helps avoid future misunderstandings.

Inventions and Non-Disclosure Agreements

The Invention and Non-Disclosure Agreement (INA) is a crucial document in the onboarding process and shares many similarities in substance to the NDA. In addition to the confidentiality obligations, the INA ensures that any inventions or intellectual property created during the individual’s employment are owned by the company. Key elements include but are not limited to: (i) definition of confidential information; (ii) confidentiality obligations; (iii) definition of inventions; (iv) assignment of inventions; (v) duration of obligations; and (vi) disclosure of prior inventions not being assigned and any third party obligations. Companies should pay special attention to this agreement and ensure that it satisfies the applicable states laws and regulations to have a valid inventions assignment. If you are not sure, you should consult with legal counsel to avoid future issues arising as to whether inventions are owned by the company.

Consulting Agreements

An early-stage company may decide that it is not yet ready to bring on additional employees or may have a need for a specific task that does not justify hiring an employee. Therefore, a company can engage a consultant using a Consulting Agreement to provide these services, but keep in mind that calling a person a consultant does not necessarily make that person an independent contractor under the law.  The early-stage company must consider several factors, such as how much control the person has over the work and whether the work is integral to the company’s business, to determine if the person will qualify as an independent contractor.  If it is not clear, the company should consult with employment counsel.  These agreements typically include similar language to that of the Offer Letter and INA. Key elements of a Consulting Agreement include but are not limited to: (i) scope of the consulting work; (ii) compensation, including whether it includes equity compensation; (iii) payment terms; (iv) independent contractor status; (v) confidentiality obligations; (vi) inventions assignment; (vii) insurance and liability; (viii) indemnification; and (ix) term and renewal. A consultant could be useful for an early-stage company looking to expand but not yet ready to take on full-time employees.

Common Pitfalls

We list below some of the more common pitfalls that early stage companies should be aware of and avoid.

• Only granting stock options as consideration for employment – Employees cannot be granted stock options as their only compensation for employment. Employees should be paid at least the minimum wage in cash.
• Failing to satisfy state laws and regulations – If certain onboarding agreements do not satisfy state laws and regulations, certain provisions (such as non-compete and non-solicitation provisions) may be voided and result in a loss of value or increased liability for the company.
• Failing to fully define confidential information in your agreements – An inadequate definition of confidential information can expose a company’s proprietary information to third parties. Care should be taken to ensure all forms of the company’s proprietary information are properly covered.
• Sharing proprietary information during the interview process without an NDA – If you anticipate sharing any proprietary information throughout the interview process, the candidate should sign an NDA prior to any discussions.
• Hiring from competitors – If you would like to hire a candidate from a competitor, you should understand the candidate’s obligations to his or her prior employer before that candidate starts working for you. Failure to do so could result in unexpected legal costs and lost management time contending with claims from the prior employer.

Efficient onboarding is not just about welcoming new talent. It is about mitigating legal risks and setting the stage for the company’s success in both the short and long term. A company may have to adapt its onboarding process to the unique needs and circumstances of the company. When in doubt, you should always seek legal counsel to ensure compliance with federal and state laws to avoid unnecessary liability for your company.