Hiring engineers · Legal agreements

What legal documents are needed to hire engineer that is paid in sweat equity?

Asnee Fernando Cause-integrated Innovator & Entrepreneur,Founder & CEO of Shoptaki

Last updated on February 14th, 2017

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April 12th, 2016

It amazes me how startups believe that they can actually "hire" needed talent for "equity" and the best of the best will jump at the chance.

"Equity" as the only compensation offered, in reality, means zero payment of anything spendable or as usable income until and if the company goes public or is sold.

If you even want to get to that stage, PAY for the talent that can get you there and that'scash plusstock/equity, not just plain equity for "sweat equity".

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

April 17th, 2016

The three documents that you need are a non-disclosure agreement, a non-compete agreement, and an agreement involving intellectual property.

One thing is that you can make the position much more attractive by letting the engineer have access over the IP.  One relatively easy way of doing this is to agree that the engineer has a license to use any software and patents that result from his work, or that they own the IP, but you have a irrevocable, non-exclusive, royalty free license to use the work that is development.  The mistake that a lot of people make is to try to lock down all of the IP, and the problem with that is that most competent engineers are willing to negotiate on this area.  It's also the situation that most competent engineers know the basics of IP law.

If you are having engineers working remotely, you are going to find it pretty much impossible to enforce those agreements at the remote location.  However, the point of the agreements is to make sure that they don't try to stop your business at your location.  If you sign these sorts of agreements with an engineer in China or the Ukraine, there is basically nothing you can do to prevent them from starting a competing business in China or the Ukraine, but your goal is to keep them from starting a competing business in the US. 

Also before paying engineers in equity, you might want to see how much cash it will take to pay them.  Engineers in India, the Philippines, and Ukraine are quite inexpensive. 

Graham Wert Co-Founder & CTO at ZenQMS and Mixette

April 12th, 2016

Typically this type of stuff would be covered in an operating agreement.  It sounds like you're trying to run pretty lean right now, so hiring a lawyer to help with an operating agreement could get expensive.  I suppose you could do it cheaply by starting from a template or using something like LegalZoom, but typically you pay for what you get.

You'll also probably want to be careful not to run afoul of any labor laws.  In most jurisdictions in the US, anyone that can't be classified as an independent contractor must be paid at least the minimum wage.  I'm not sure if listing someone as a shareholder in an operating would cause problems with that.  I believe the only exception to paying minimum wage in many jurisdictions is if the employee has a stake of X% in the company (where X is something like 20%).

Of course, if you really trust the people you're working with/hiring, you could get by on a handshake deal for a little while until some revenue or investment money comes in.  I've done this a couple of times in the past myself, but there's always more risk in doing that way.

Sebastian Martinez-Miranda

April 12th, 2016

If you're looking for a source of templates, Doracy (docracy.com) has some solid ones. If you're trying to save on costs but would like to have an attorney draft up some documents, you can also check out UpCounsel (upcounsel.com). They normally suggest fixed rates for certain jobs and often offer free 15 minute consultations to see what you need for the project you are undertaking. If anything, the consultations should help give you a better understanding of what you can/need to do.

With regards with working with a developer to build the MVP, you should have them sign a Confidentiality & IP Assignment Agreement to make sure that all work done/IP belongs to the company.

Jeffrey Miller Labor + Employment Partner, Brennan Manna & Diamond LLC

April 13th, 2016

I agree with Sebastian that the important consideration is protecting your IP.  You'll want to have the individual execute at least 2 agreements: a Non-Circumvention, Non-Competition, and Non-Disclosure Agreement; and, a Development Agreement (or Work For Hire Agreement).  You also may want to check with attorneys in each state for any issues with consideration for the agreements, and any quirks in employee vs. independent contractor evaluations.  The equity portion is the easiest (back of a napkin).  

Joe Valof Independent General Counsel [IGC]

April 18th, 2016

Asnee, you really don't need 3 separate agreements, that generally complicates the situation. I have successfully used a template that I prepared for my tech clients that combines all the issues mentioned by Joe, and it should be a 'work made for hire' arrangement, that is key. IP ownership is generally owned by the company and not by a particular person, even the founder. I would not recommend negotiating IP ownership as it becomes critical when you either are looking for funding or want to sell the company. Let me know if I can be of any further help. 

Asnee Fernando Cause-integrated Innovator & Entrepreneur,Founder & CEO of Shoptaki

April 12th, 2016

Thanks Graham for you answer, really appreciate it. I have been looking at templates but figuring out how to vest actual stocks and not stock options.

Neil Licht: in regards to your response, If i had the money I would pay for the talent, but I wasted my money on incompetent developers overseas and learned a valuable lesson.  I prefer to retain as much equity as possible, but instead looking for potential partners who would help make my vision a reality.  

 Any company that is starting out doesn't pay themselves or their partners until they get some investment or has launched and making some profit. Hence the reason Entrepreneurs bootstrap as much as possible and find like minded people to join them to create something great. They take the RISK knowing they can contribute to making company and themselves successful and if it fails they have the experience. so even The best of the best if they believe in the concept and wants to partner in some entrepreneur's project that is up to them based on if they believe in it and want to be part of it.  

You can't assume that I or some other start-up are just wanting free work, instead its more of building a team and making sure they are well taken care of, and if it succeeds they are well financially taken care of. That's one of the points of a startup to be able to build a team that can eventually grow into a big company. 

Graham Wert Co-Founder & CTO at ZenQMS and Mixette

April 12th, 2016

If you're incorporated as an LLC, something like this might be an option:


In the LLC operating agreement, you can also define different classes of "units" or membership interests (e.g. Class A units have voting rights while Class B units do not).  It's probably a lot more complicated with an S corp or C corp.

Asnee Fernando Cause-integrated Innovator & Entrepreneur,Founder & CEO of Shoptaki

April 13th, 2016

Thank you so much Sebastian, this info is really great and thanks Graham for the Advice as well. 

Steven Corn CEO at Metis Advantage

April 13th, 2016

Jeffrey is spot on.  You need to own all the rights to the work being done.  A work for hire agreement and a good NDA/Non... agreement is absolutely necessary.  However, the work for hire has to acknowledge some exchange of real consideration.  Equity that is possibly worthless may not qualify.  So I would suggest a small stipend payment with the equity will cover you sufficiently.