Starting a technology company may be rewarding, but there are a lot of considerations. Tech companies’ ideas are routinely stolen and re-purposed; they often must rely on other people during the development process; they may require a lot of capital (especially companies that will produce a tangible product); and building a company that outlasts the founder requires substantial planning.
Let’s address these issues in several posts: protecting your assets, establishing and managing relationships (the subject of this post), attracting capital, and exit planning.
Establishing and Managing Relationships
The adage that “it’s not what you know, it’s who you know” definitely applies to technology companies. It is very unlikely that you will be able to grow even a small technology company by yourself. Whether you are an engineer, software developer, data scientist, hardware developer, or a non-tech person who thinks he has a great idea, the technical aspects will be only one piece of your company. Once your idea is developed you have to execute on that idea; and that usually requires relationships with people who will help you.
Every business relationship is a contract!
The question is, what kind of contract are you going to have for each of those business relationships with people who are going to help you reach your business goals?
What are your options?
Option 1: Working with Independent Contractors.
Engaging independent contractors is often the first choice when entrepreneurs need people to help. This is especially true for engaging people who provide services that are outside the core competency of your business, including accountants, attorneys, and website developers. But what about more fundamentally important persons, such as administrative help and product designers? To have an independent contractor means you cannot exert the kind of control over how they do their jobs that you would be able to if they were employees. If you exert too much control over the manner, place and tools used by these people the IRS will likely deem your people to be employees, no matter what you try to call them, even if you and your “independent contractor” agree in a contract that they are not employees. The allure of independent contractors is an impression that you have less “overhead” because don’t have to give them benefits or office space; but of course you will often have to pay those independent contractors more than you would a direct employee, because the contractor has to cover the overhead you are not providing for.
Option 2: Hiring Direct Employees. (“at will” vs. contract for a term of time)
You can have more control over direct employees than over independent contractors, but many entrepreneurs avoid direct employees because of a fear that it will be difficult to let them go. That doesn’t have to be the case. If you enter into a written contract for a term (of time) with an employee, then the contract provisions will dictate the conditions under which you and the employee can part ways. If you are hiring a key employee, you might want to lock him or her up for a while; just be sure to write in provisions that allow you (or the employee) to terminate the agreement under certain (hopefully unlikely) conditions. But even in the absence of a contract for a term, most jurisdictions in the US recognize an understood relationship of “at will” employment. Under this understanding, you or the employee may terminate the relationship at any time for any lawful reason. But be careful, don’t accidentally do or say something to lead the employee to believe there really is a contract for a term. Without written termination provisions if you try to let that employee go you might be liable to pay his salary for the remainder of the implied term. You also may not fire any employee for illegal reasons, such as racial bias or for trying to organize a union.
When you are weighing the pros and cons of independent contracting vs. hiring a direct employee, you also have to consider
(1) how you are going to protect the ideas that form the basic competitive advantage of your company;
(2) how much are you going to invest in the persons to accomplish the tasks you have identified for them;
(3) how are you going to keep them engaged and motivated;
(4) how easy will it be to terminate the relationship? (The answer may surprise you.)
Here’s a table that summarizes some of the differences.
|Independent Contractors||Direct Employees|
|Protecting your ideas in the relationships||Copyright laws, NDA||Non-Compete Clauses, Non- Solicitation ClausesNon- Disclosure clauses|
|Motivation and compensation||You will have to negotiate their pay depending on their demand, quality of work, and other variables to consider. Money will more likely than not be a key motivator.||Depending on the skillsets you are looking for, you have an opportunity to introduce new motivators: training, employee benefits, ect. This may reduce the amount of dollars you invest in the employees.|
|Challenges in managing the relationship||You have to make sure your contract, deliverables, and expected dates of completion are in your contract. Most of the time, Independent contractors will try to leverage a few contracts at a time, so you have to be very explicit on your deadlines and tie that into their bottom line.||Some employees aren’t as self motivated and you can’t always leverage their compensation with specific deliverables, so you have to always be creative in defining what those motivators are so you are able to yield the productivity you need to accomplish those tasks.|
|Terminating the relationship||Only according to the contract, which is often written to the advantage of the contractor.||If employee is “at-will” termination is easy unless you have a “bad” reason (retaliation, discrimination). If under contract the contract is probably written in your favor.|
Be sure to consult an attorney to obtain legal advice on hiring employees or engaging independent contractors. Then use your people to reach your business goals and maximize the value of your company.
Argent PlaceⓇ Law, PLLC serves businesses and business owners in matters of business and contract law (including hiring employees or independent contractors), intellectual property law (patents, trademarks, copyright, and trade secrets), and business succession planning, including personal estate planning with wills and trusts. By integrating these fields of law, Argent Place Law is the law firm For The Life Of Business.TM