The scenario. A Series Seed-stage startup has just closed $2 million. The founder is making his first full-time hire: a senior backend engineer who has agreed to a $150,000 salary and is asking for “1% equity.” The founder wants to do this right — he has heard horror stories about employees claiming ownership of code, of options issued without a plan in place, and of employees who later sue claiming they were not at-will.
Step 1: Adopt an equity incentive plan
You cannot grant stock options before adopting a plan. Options granted outside an authorized plan have no special tax treatment and may not be legally enforceable. The founder’s first move is to have the board adopt an Equity Incentive Plan with a reserved pool — typically 10–15% of fully diluted shares at the seed stage. The plan covers ISOs (preferred for U.S. employees), NQSOs (for contractors and advisors), and restricted stock.
Step 2: At-will offer letter
The offer letter states clearly that the engineer is an at-will employee — the company can terminate him at any time, with or without cause, and he can leave at any time. The letter spells out the salary, the start date, the title, eligibility for benefits, the offered option grant (subject to board approval), and a reference to the PIIA, which must be signed before or on day one.
What the offer letter does NOT do: promise continued employment, promise a specific term, or describe the equity as “guaranteed.” Loose language in offer letters is the source of most early-stage employment disputes.
Step 3: PIIA signed before the engineer touches code
The PIIA assigns to the company all work product created during employment, with a present-tense assignment that survives the Stanford v. Roche problem. It also acknowledges receipt of confidential information and lists any “Prior Inventions” that belong to the engineer personally (the form has a schedule for this). Sign this BEFORE the engineer’s first commit. Once code is in the repo without an executed PIIA, the chain of title is contestable.
Step 4: The option grant
The board approves the grant by written consent. The Stock Option Grant Notice and Agreement spells out the number of shares (1% of fully diluted), the exercise price (the 409A fair market value), the vesting schedule (four years, one-year cliff), the post-termination exercise period (typically 90 days), and that the grant is an ISO to the maximum extent permitted by the $100,000 annual vesting limit under IRC § 422(d).
The engineer receives the Grant Notice, the Stock Option Agreement, a copy of the Plan, and an Exercise Notice form. He signs the Grant Notice. The company files the grant in its option register and sends a stop-transfer notice to the transfer agent.
Why each piece matters
- The plan establishes the legal scaffolding (ISO tax treatment, valid grants, plan-administrator authority).
- The offer letter establishes the at-will employment relationship and the headline terms.
- The PIIA protects the IP and the customer/vendor information the engineer will see.
- The grant notice and agreement create the legally binding option contract on the company’s standard terms.
Total drafting time, done together: a few hours. Total dollar value of getting this right: typically the entire equity outcome of the eventual exit.
Talk to a Florida Business Lawyer
If you are navigating a scenario like this one, schedule a consultation with Montague Law at 904-234-5653 or use the contact form. The firm represents founders, investors, and business owners statewide and nationally from offices in Fernandina Beach and Coral Gables (Miami).
Templates and resources referenced
- At-Will Offer Letter
- Proprietary Information and Inventions Assignment (PIIA)
- Equity Incentive Plan
- Stock Option Grant Notice and Agreement
This case study is a composite illustration drawn from common founder scenarios. It does not describe any specific client or matter and is provided for general informational purposes only. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Consult counsel for guidance tailored to your specific facts.
