Equity, tax and compliance
Hiring Your First Employees and Contractors: US and International Checklist for Startups
The short answer
For each first hire, decide first whether the person is an employee or a contractor based on how the work is actually done, not on the label: control over how and when the work is done, integration into the business and economic dependence point to employment. Employees need an at-will offer letter, a CIIAA, tax and work authorization forms, payroll and state registrations, and a board-approved option grant priced at a current 409A value. Contractors need a written agreement with a present IP assignment. Outside the US, hire through genuine independent contractors, an employer of record or a local subsidiary, because local labor law usually treats a full-time, supervised "contractor" as an employee.
Key numbers
| Item | Rule or benchmark | Source |
|---|---|---|
| Form I-9 completion | By the employee's third business day of work | US Citizenship and Immigration Services |
| Standard employee vesting | 4 years, 1-year cliff | Market practice |
| Post-termination option exercise window | 90 days typical | Market practice |
| Median seed-stage option pool | 11.8% | Carta (2025-2026) |
| California employee non-competes | Void, with notice obligations for unlawful clauses | California Business and Professions Code 16600 and 16600.1 |
| Mexico statutory year-end bonus (aguinaldo) | At least 15 days of salary | Mexican Federal Labor Law |
| Mexico minimum vacation, first year | 12 days (since 2023 reform) | Mexican Federal Labor Law |
| Mexico employee profit sharing (PTU) | 10% of taxable profit, with caps | Mexican Federal Labor Law |
Step 1: employee or contractor?
Misclassification is the most common and expensive hiring mistake. Labels in a contract do not decide it; the facts do.
Signs of an employee: the company controls how, when and where the work is done; the person works only or mainly for you, full-time and indefinitely; uses your tools and systems; is integrated into the team and core product; is paid by the hour or month rather than by deliverable.
Signs of a contractor: a defined project or deliverable; the person controls methods and schedule; has other clients; uses their own tools; invoices; can hire helpers; bears some business risk.
Federal tests (IRS common law factors, and the Department of Labor's economic reality test, whose regulatory version changed in 2021, 2024 and 2025) and stricter state tests (California's "ABC" test under AB5, and similar tests in other states) apply. Consequences of misclassification include back payroll taxes, penalties, overtime and benefits claims and, internationally, severance.
Step 2: documents for an employee
- Offer letter: title, start date, salary, exempt or non-exempt status, at-will employment, benefits, and that "management will recommend to the board a grant of an option to purchase X shares" (state a number of shares, not a percentage, and do not promise an exercise price).
- CIIAA with prior inventions exhibit and state notices (such as California Labor Code 2870). See IP assignment.
- Form I-9 (work authorization, by day 3) and Form W-4; state withholding forms.
- Payroll registration in each state where employees work, unemployment insurance and workers' compensation insurance.
- Board consent approving the option grant with the current 409A exercise price, followed by the grant notice and option agreement. See stock options 101.
- Policies: a short handbook acknowledgment, expense policy, equipment and security policy.
Non-competes: California and several other states prohibit most employee non-competes, and the FTC's nationwide rule did not take effect. Use confidentiality and non-solicitation clauses where enforceable.
Step 3: sizing the first grants
Acme has 10,000,000 fully diluted shares and a current 409A value of $0.20 per share. It hires its first senior engineer at a $150,000 salary with a grant of 0.75%.
- Shares: 0.75% x 10,000,000 = 75,000 options at a $0.20 exercise price (cost to exercise everything: $15,000).
- Vesting: 25% (18,750) at 12 months, then 1,562.5 per month for 36 months.
- If the Series A later prices preferred at $2.00 and the company eventually sells for the equivalent of $10.00 per common share, the gross value of the grant is 75,000 x ($10.00 - $0.20) = $735,000, before tax and further dilution.
Lower-salary offers can come with more equity; many startups publish a simple matrix by level so grants stay consistent.
Typical ranges for the first ten hires vary widely by market, role and salary; senior early engineers often receive between 0.25% and 1.5%, and the first senior executives more. Base grants on your pool and hiring plan; see the option pool shuffle.
Step 4: documents for a contractor
- Consulting agreement with deliverables, fees, independent contractor status, present assignment of IP ("hereby assigns"), confidentiality, moral rights waiver, and no authority to bind the company.
- Form W-9 for US contractors (Form 1099-NEC at year end if paid $600 or more; the threshold rises to $2,000 for payments made after 2025 under the 2025 tax law), or Form W-8BEN for foreign individuals.
- Avoid making IP transfer conditional on payment.
- Options for contractors are NSOs, not ISOs.
Hiring outside the United States
Three routes:
| Route | When it fits | Watch out for |
|---|---|---|
| Independent contractor | Truly project-based work, part-time or with other clients | Local misclassification rules; IP formalities; tax registration of the contractor |
| Employer of record (EOR) | One to a few full-time people in a country, quickly | Monthly fees; make sure IP flows from the employee to the EOR to your company; equity grants still come from your plan |
| Local subsidiary | A growing team in one country | Setup cost, local accounting and tax compliance, transfer pricing |
Mexico as an example
- Employment is defined by subordination. If the company directs the work, sets schedules and pays a regular salary, Mexican law treats the relationship as employment regardless of a "services contract" label. Employees are entitled to social security registration (IMSS), housing fund (INFONAVIT) contributions, an annual bonus (aguinaldo, at least 15 days of salary), vacation (12 days in the first year, increasing with seniority), vacation premium, profit sharing (PTU) and statutory severance on unjustified dismissal.
- Outsourcing reform (2021): subcontracting personnel to perform the company's core activities is prohibited; specialized services providers must be registered (REPSE). An EOR arrangement must be structured accordingly.
- IP: economic rights in software created by employees in the course of their duties belong to the employer unless agreed otherwise; for contractors use a written assignment of economic rights; moral rights remain with the author.
- Equity: options granted by the Delaware parent to employees of a Mexican subsidiary can create Mexican taxable income at exercise and payroll withholding obligations for the employer; document recharges carefully.
- Permanent establishment: a dependent team in Mexico acting for the US company may create a taxable presence; a subsidiary or EOR usually manages that risk. See non-US founders.
Frequently asked questions
Should my first hire be an employee or a contractor?
It depends on how the work is done. Full-time, supervised, ongoing work integrated into your product usually means employee. Use contractors for defined projects where the person controls the method and schedule.
What documents does a startup need to hire its first employee?
An offer letter, a CIIAA, Form I-9 and Form W-4, payroll and state registrations, workers' compensation insurance and a board-approved option grant with a 409A-based exercise price.
Can I give stock options to contractors?
Yes, non-qualified options (NSOs) under the equity plan. Incentive stock options are only for employees.
How do I hire someone in Mexico or Latin America?
Through a genuine independent contractor agreement for project work, an employer of record for full-time employees, or a local subsidiary. Full-time supervised work is usually employment under local law.
Do I need a 409A valuation before the first option grant?
Yes. The exercise price must be at least the fair market value on the grant date, and an independent 409A valuation is the standard way to support it.
Can I put a non-compete in an employee's offer letter?
In California and several other states, employee non-competes are void. Elsewhere enforceability varies. Confidentiality and non-solicitation clauses are more reliable.