Why Founders Should Be Cautious with Employment Agreement Templates

Startup founders operate in a world where speed, flexibility, and resourcefulness often take priority. When it’s time to bring on employees, many founders understandably look for quick solutions—like using a template employment agreement found online or passed along by a peer.

And while having a well-drafted template is a good starting point, relying on that alone without legal guidance can lead to serious consequences. Employment law is not just complex, it's also highly state-specific. A clause that’s standard in one state may be unenforceable—or even illegal—in another. And mistakes in this area often don’t become apparent until it’s too late, whether in the form of a dispute, a government audit, or a failed diligence process during a funding round.

This post outlines the key risks startup founders should understand before treating employment agreements as one-size-fits-all. It also explains how to create a legal employment foundation that’s both practical and scalable.

Employment Law Varies Widely by State

Startup employment agreements are often built on assumptions that don’t hold across jurisdictions. Below are several areas where state law significantly affects what can and cannot be included in a legally enforceable employment contract.

• Non-Compete Clauses
  Some states, including California, Oklahoma, and Minnesota, prohibit employee non-compete agreements altogether. Others, like Washington and Illinois, allow non-competes but impose strict requirements, such as minimum salary thresholds and written notice. Including a non-compete clause that violates these laws isn’t just a technical issue—it can expose a company to statutory penalties, including attorney’s fees and civil fines. (Note: the status of non-competes has also been subject to federal-level scrutiny. Read more about that here: The FTC and Non-Compete Enforcement)

• IP Assignment and Invention Clauses
  California, in particular, restricts employers from claiming ownership of inventions developed by employees on their own time and without use of company resources. If your employment agreement does not include the required statutory carveouts, the IP assignment provision may be invalid—and your company may not actually own the work product your employees create.

• Commission and Bonus Terms
  Several states require commission structures to be in writing and clearly define when a commission is earned and payable. Without this clarity, companies risk wage and hour claims. Even discretionary bonuses, if not structured correctly, can raise legal questions in certain jurisdictions.

• Final Pay and Accrued PTO
  Many states have specific laws governing when a final paycheck must be delivered and whether unused paid time off must be paid out. For example, California requires that final wages be paid immediately if the employee is terminated and within 72 hours if they resign without notice. Failing to follow these requirements can lead to automatic penalties, regardless of whether the company acted in good faith.

• At-Will Employment Disclaimers
  Even when founders include at-will employment language in their agreements, courts may find implied promises of continued employment if the rest of the agreement, or accompanying materials like employee handbooks, contain contradictory language. Without careful review, the company may inadvertently forfeit the flexibility at-will employment is designed to preserve.

• Dispute Resolution Provisions
  Many founders include mandatory arbitration clauses or forum selection clauses without realizing these provisions may be restricted or void in some states. In California, for example, recent legislation has challenged the enforceability of mandatory arbitration agreements in employment contracts, particularly if they are a condition of employment.

A Real-World Example of How These Issues Surface

One company our firm work with with had previously hired a remote employee in California using a “standard” employment agreement they had sourced on their own, before seeking legal guidance. The agreement included a non-compete clause, lacked California-specific invention carveout language, and didn’t address final pay obligations under California labor law.

When the employee eventually left on unfriendly terms, the client moved to enforce their rights under the contract. The employee retained counsel and raised several legal concerns. The company ended up settling for $10,000—not because it had done anything intentionally wrong, but because the agreement simply didn’t comply with California law. That’s in addition to the costs of revising future agreements and tightening internal processes.

The takeaway here isn’t that the company made a bad decision. It’s that employment law is nuanced enough that even well-meaning companies using seemingly “standard” documents can end up exposed. These types of issues are among the most common problems we see when early-stage companies rely on templates that haven’t been properly tailored to their jurisdiction or business model.

A Practical Legal Strategy for Startup Hiring

To be clear, founders don’t need to run every employment contract by an attorney, especially not specialized attorneys with high hourly rates. That’s not realistic or cost-effective. But what is realistic (and highly advisable) is to:

• Use a strong, startup-friendly employment agreement template as a starting point

• Have it reviewed once by employment counsel who understands your jurisdiction, compensation structures, and growth plans

• Reuse that vetted version, with minimal adjustments, for most future hires

• Identify and flag non-standard situations (e.g., commission plans, out-of-state employees, equity-based compensation) for additional review

This approach is far less expensive than defending against a wage claim or fixing compliance issues during due diligence, and it allows your team to scale quickly without creating hidden legal risk.

How Investors View Employment Risk

In later-stage fundraising or acquisitions, your company’s employment practices may come under close scrutiny. Diligence teams often request employment agreements, IP assignments, and confirmation that all employees have valid work-for-hire documentation. If the agreements you used are outdated, legally noncompliant, or include illegal clauses, you may be asked to resolve these issues before closing—sometimes at significant cost or risk to the deal itself.

Addressing employment contract issues proactively helps build credibility with investors, avoid delays during fundraising, and demonstrate maturity in how you approach risk management.

What to Do Next

If you’re a founder preparing to make your first hire, or if you’ve already made a few and are unsure whether your contracts are in good shape, take time now to make sure your foundation is sound. You don’t need to spend heavily or slow down operations. You just need to make sure the documents you’re relying on reflect the real legal obligations that apply to your business.

Valle Legal provides employment agreement templates designed specifically for startups, with optional light-touch or deep-dive legal review available depending on your needs. We also work closely with employment counsel who can advise on more complex questions without overlawyering simple decisions.

If you’d like to receive a vetted employment agreement template or schedule a review of your current hiring documents, contact us.

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Valle Legal, PLLC, serves entrepreneurs, corporations, and other businesses at every stage of the company lifecycle: from formation and founding, to financing and fundraising, to merger, acquisition, or other exit. Our clients are based throughout the United States, including the Research Triangle of North Carolina, the Southeast, Silicon Valley, San Francisco, Boston, New York, and Delaware. Our clients operate in a broad range of industries including life science, software, cleantech/climatetech, insurtech, fintech, IoT, consumer products, and B2B services. We also represent investors, venture capital funds, and private equity groups who invest in and purchase companies throughout the United States.

We approach our client relationship as part of your team: we’re engaged, dedicated, and proactive. Our goal is to provide clear, structured, and value-driven paths from founding to exit. Reach out to us anytime at info@vallelegal.com.