What Legal Documents Does a Startup Need Before Hiring Its First Employee?

Before a US startup hires its first employee, it should document the role and compensation, confirm the worker is classified correctly, put confidentiality and intellectual-property terms in writing, approve any equity grant, and prepare the federal and state onboarding records required for payroll and work authorization. The exact package depends on where the employee works, what they do, and how they are paid. Treat this as a readiness checklist, then have employment and tax counsel adapt it to the company and state.

Educational information only. This is not legal, tax, accounting, or investment advice.

Decide whether the worker is really an employee

Do not choose between “employee” and “contractor” based on which option is cheaper or easier to administer. Classification depends on the actual relationship. The US Department of Labor applies an economic-reality analysis under the Fair Labor Standards Act. The IRS 2026 Employer's Supplemental Tax Guide separately looks at behavioral control, financial control, and the type of relationship. State tests can be stricter. Before the person starts, write down:

what work they will perform;
who controls how, when, and where the work is done;
whether the relationship is ongoing;
who provides tools and bears business expenses;
whether the person is integrated into the company's normal operations;
which federal and state classification rules were reviewed. If the facts look like employment, calling the document a contractor agreement does not fix the classification.

Put the offer and employment terms in writing

The offer letter should match the role the company actually intends to create. At minimum, confirm:

legal employer name;
title, manager, work location, and intended start date;
salary or hourly rate and payroll frequency;
exempt or nonexempt classification when applicable;
bonus or commission terms, including what is discretionary;
benefits eligibility;
any equity offer, subject to the plan, grant documents, and required approvals;
contingencies such as work authorization or background checks;
the governing state and any lawful at-will language. Avoid treating the offer letter as the only employment document. Confidentiality, intellectual property, arbitration, restrictive covenants, commission plans, and state notices often need separate terms. Restrictions that may be familiar in one state can be unenforceable or require special notice in another.

Protect company information and intellectual property

The company should have a signed confidentiality and invention-assignment agreement before the employee receives sensitive information or contributes to the product. The agreement should fit the job and state law. It commonly addresses:

confidential company, customer, and partner information;
ownership of work created within the employee's duties;
disclosure of pre-existing inventions or open-source obligations;
return of company property and account access;
required handling of third-party confidential information;
continuing obligations after employment ends. Do not ask a new hire to bring a former employer's code, customer list, files, or other confidential material. For technical roles, align the agreement with the company's open-source and AI-tool policies so the written rule matches how the team actually builds.

Approve equity before promising a percentage

An equity sentence in an offer letter is not a completed grant. A startup normally needs an adopted equity plan or another valid issuance route, the required company approvals, a grant agreement, and a cap-table entry that reconciles to those documents. The SEC's Rule 701 guide explains the federal exemption commonly used by non-reporting companies for compensatory securities. Rule 701 has limits and disclosure requirements, and state securities rules can still apply. Before communicating equity, confirm:

the type and number of securities, not only a headline percentage;
the capitalization basis used for any percentage;
vesting, cliff, exercise price, and expiration terms;
the equity plan and grant approval process;
applicable tax and securities-law review;
the deadline and process for any tax election relevant to the award. The employee should receive the actual plan and grant documents. The offer letter should not promise terms the board, plan, or cap table cannot support.

Prepare federal onboarding records

Every US employer needs a repeatable process for work authorization, tax withholding, payroll, and recordkeeping.

Form I-9

The employee must complete Section 1 of Form I-9 no later than the first day of paid work, and only after accepting the offer. The employer generally completes Section 2 within three business days of the start date. Use the current USCIS Form I-9 instructions, follow the permitted document process, and retain the form securely.

Form W-4 and payroll

The IRS says a new employee must complete Form W-4 so the employer can calculate federal income-tax withholding. Register the company with the relevant federal and state payroll agencies, configure payroll before the first wage payment, and keep the company's payroll records separate from personal accounts.

Wage, hour, and workplace requirements

Confirm minimum wage, overtime, meal and rest rules, pay frequency, expense reimbursement, required postings, and workers' compensation for the employee's work location. The Department of Labor's guide for new businesses is a federal starting point, not a substitute for state and local rules.

Add the employee's state and local documents

A remote startup does not have one universal hiring package. The employee's work location can trigger payroll registration, leave rules, wage notices, workers' compensation, unemployment insurance, privacy requirements, and local postings. For a California hire, for example:

the Employment Development Department requires employer registration in applicable cases and says California employers must carry workers' compensation insurance;
new and rehired employees must be reported to the New Employee Registry within 20 calendar days of starting work;
many employees must receive the state Notice to Employee containing pay-rate, payday, employer, and workers' compensation information;
employers must satisfy the current California workplace-posting requirements, including remote-delivery rules where applicable. Check the employee's city as well as their state. Local minimum wage and leave requirements can differ from the statewide baseline.

A practical first-employee document checklist

Before the start date, confirm that the company has:

a written classification analysis;
a signed offer letter;
confidentiality and invention-assignment terms;
a role description and compensation record;
an equity plan, company approval, and grant agreement when equity is offered;
payroll and employer registrations;
workers' compensation coverage;
current Form I-9 and Form W-4 processes;
required state and local notices;
a handbook or core policies appropriate to the team and location;
a secure personnel-file and document-retention process;
a cap table and board record that match every equity promise. The first hire creates the template for every hire that follows. A small, accurate file is more useful than a large set of generic documents that nobody updates.

Frequently asked questions

Can a startup hire someone as a contractor first and convert them later?

Only if the contractor classification is supported by the real working relationship during that period. A planned future conversion does not make an employee-like relationship lawful today.

Is an offer letter enough to protect startup IP?

Usually not. Use a separate confidentiality and invention-assignment agreement adapted to the role and governing state, and make sure the company's development practices follow it.

Can the offer letter promise “1% equity”?

It can describe a proposed grant, but the company should define the share or option amount, capitalization basis, vesting, plan terms, and approval conditions. The actual grant must be supported by the equity documents, company approvals, cap table, tax analysis, and securities-law exemption.