Startup Employment Agreements: What's Different and What to Watch For

Joining a startup is a fundamentally different risk profile than joining a big tech company. The equity is different, the legal infrastructure is often thinner, and the employment agreement reflects those differences in ways that can bite you later if you don't understand them going in. Here's what early employees need to pay attention to.

Options vs RSUs: The Key Difference

Big tech companies typically grant RSUs — restricted stock units that vest over time and settle as shares with no out-of-pocket cost to you. Startups at the pre-IPO stage typically grant stock options, and that distinction is enormous.

With stock options, you receive the right to purchase shares at a specific price (the strike price) set at the time of grant. That strike price is set at the fair market value of the company's shares on the grant date, as determined by a 409A valuation (an independent appraisal required by the IRS). If the company's value increases after your grant, your options become valuable — the shares are now worth more than what you'd pay to exercise them. If the company's value doesn't increase, your options may be underwater (worth less than the strike price) or worthless.

You have to actually pay the exercise price to receive the shares. That costs real money, and it happens before you know whether the company will succeed. This creates a very different risk profile than RSUs.

IP Assignment at Startups: Extra Caution Needed

IP assignment clauses at startups are often even broader than those at large companies, for a straightforward reason: for most early-stage startups, their intellectual property is their primary — sometimes only — asset. Investors are buying the IP. The founders and early employees know this, and the agreements tend to reflect it.

What this means practically: startup employment agreements often include aggressive invention assignment language that attempts to capture anything even tangentially related to the company's business. The prior inventions schedule is not a formality here — it may be the only protection standing between your personal projects and an assignment you didn't intend to make.

Outside California, startup agreements may also include broader non-competes than you'd see at established companies. Startups in Texas, Washington, or New York may include non-compete clauses that are theoretically enforceable — and early employees, particularly at the founding team level, are often the targets of enforcement if things go sideways.

The 90-Day Exercise Window Problem

Most startup option grants include a post-termination exercise window of 90 days. This means: if you leave the company (for any reason), you have 90 days to exercise your vested options or you lose them permanently.

Exercising options costs money — the aggregate exercise price, plus the tax consequences of exercising (NSOs create ordinary income at exercise; ISOs can trigger AMT). If you've been at a startup for three years and vested a meaningful number of options, the exercise cost on departure could be significant. Many employees discover this only when they're about to resign and realize they can't afford to keep the equity they've earned.

Some companies offer extended exercise windows — one year, five years, or even the life of the option (10 years). If the company you're joining hasn't considered this, it's worth raising during negotiation. It costs the company almost nothing to extend the exercise window, and it removes a significant source of hardship for departing employees.

Non-Competes Outside California

If you're joining a startup outside California — Austin, New York, Seattle, Boston — the non-compete analysis changes substantially. In these states, non-competes are often enforceable if they're reasonable in scope, duration, and geography, and if supported by adequate consideration.

For early employees at a startup, the consideration question often looks like: "We're giving you access to our trade secrets, confidential business strategy, and equity in the company — in exchange, you agree not to compete for 12-18 months if you leave." Courts in many states have found this to be adequate consideration.

What to look for: how is the restricted activity defined? Is it just your specific role, or all of the company's business areas? The broader the definition, the more constraining it becomes if the startup pivots or expands.

Severance (or Lack Thereof)

Don't expect severance provisions in a startup employment agreement. Most startups don't offer contractual severance for non-officer employees. You may be at-will, which means you can be let go on no notice with no contractual obligation to pay you anything beyond your final paycheck.

What sometimes gets negotiated at the founding team level: change-of-control severance (if the company is acquired and you're terminated, you receive some defined benefit). These provisions are more common for executives and early employees who have leverage in the negotiation, but they're rare in standard offer letter packages.

What to Negotiate as an Early Employee

A few items that are genuinely negotiable at the early-employee level:

• Extended exercise window: Ask for 1-5 years post-termination, not 90 days.
• IP carve-out: Get specific side projects explicitly excluded in the prior inventions schedule.
• Double-trigger acceleration: On acquisition, vesting should accelerate if you're also terminated — not just on acquisition alone.
• Strike price confirmation: Ask for the most recent 409A valuation and confirm your strike price matches it.
• Option type: Confirm whether your grant is ISOs or NSOs — the tax treatment differs significantly.

The Bottom Line

Startup employment agreements require careful review precisely because they're less standardized than Big Tech agreements and often drafted with fewer resources and less employee-friendly defaults. Paste your startup employment agreement and option grant into dott.legal for a free AI risk analysis that flags the clauses that matter most. For situations involving meaningful equity, a broad non-compete, or IP you want to protect, attorney-validated review is $349 with 24-hour turnaround.