This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Early-stage companies spend enormous energy negotiating the headline terms of a key hire — the title, the cash, the percentage of the company. Then those terms get papered in a hurry, often by stitching together a service agreement, a stock plan, an option grant, and an invention-assignment exhibit that were each drafted at different times by different people. The headline number ends up correct, but the machinery underneath it quietly contradicts itself.
Most equity and intellectual-property disputes that show up in practice do not come from a bad deal. They come from good deals described imprecisely across documents that were supposed to fit together and did not. This post walks through the drafting decisions that matter most when a company grants equity and assigns IP to a contractor or executive, and the places where agreements tend to drift out of alignment. None of this is legal advice for any particular situation; it is a drafting checklist born of watching the same avoidable problems recur.
Define the thing before you do anything to it
The simplest discipline in contract drafting is also the most neglected: name a concept once, with a capitalized defined term, and then use that exact term every time you refer to it. Vesting provisions are a classic offender. A grant will say something like “half of the award is vested at grant and the other half vests monthly,” and then three sentences later it will refer to “the unvested portion,” “the remaining shares,” and “the time-vesting tranche” as though those are all obviously the same thing. They usually are — until someone needs them not to be.
If a chunk of equity is going to be subject to special treatment, give it a name. Call it the “Remaining Unvested Equity Award” or whatever you like, define it precisely (for example, “the half of the Award that is not vested as of the grant date, representing X% of the Company’s fully-diluted capitalization”), and then attach every downstream consequence — forfeiture, acceleration, repurchase — to that defined term. The payoff is that when you later write “the Remaining Unvested Equity Award is forfeited upon termination,” there is no argument about what is forfeited and what is not. The reader does not have to reconstruct intent from context.
This matters most at the boundary between vested and unvested. A well-drafted forfeiture clause says, in substance: the then-unvested portion is forfeited on termination, and for the avoidance of doubt the portion that has already vested — including any up-front vested amount and any installments that have vested over time — is not. That parenthetical “for the avoidance of doubt” sentence feels redundant when you write it. It is not. Without it, a broad reference to a defined “unvested” bucket can be read to sweep in shares that had, in fact, already vested, and the company will spend far more on the argument than the sentence cost.
Design the vesting schedule deliberately
Founders love creative vesting. Some equity vested up front to reward someone who has already been contributing; the rest vesting monthly with no cliff; perhaps an ongoing condition like a minimum level of engagement. These structures are fine, but each twist needs to survive contact with the company’s stock plan and its equity-management software.
Two questions to ask of any custom schedule. First, can the company’s cap-table platform actually track it? Most platforms model time-based vesting cleanly — monthly or quarterly installments over a term. They do not model qualitative conditions like “continues to provide a minimum level of services” or “holds regular check-ins.” If vesting depends on a condition the software cannot represent, that condition has to live as written language in the grant documents, and someone has to be responsible for determining, period by period, whether it was met. Decide in advance what happens when it is not met: does that period’s installment simply fail to vest, does vesting pause, or does the whole future schedule stop? “Vesting continues only so long as X” reads like permanent cessation; if a gentler outcome is intended, say so.
Second, does a custom condition interact cleanly with the forfeiture and termination provisions? If equity stops vesting when a condition lapses, and separately is forfeited on termination, make one expressly subject to the other so they cannot be read as independent and conflicting rules. A short “subject to the following paragraph” cross-reference does the work.
Make the agreement and the plan actually agree
When equity is granted under a company’s equity incentive plan, the parties are really dealing with at least three documents: the service or employment agreement that promises the equity, the plan itself, and the award agreement (the option grant) that documents it. The plan and award agreement almost always contain a clause saying they control the terms of the award. The service agreement almost always contains its own economic terms. If those two sets of terms diverge, there is a problem, and the problem typically resolves against whatever the plan says, because the plan is the governing instrument for the award.
The clean approach is to state expressly, in the service agreement, which terms control over the plan and award agreement — for instance, the definition of “cause” and the vesting schedule — and to provide that the parties will resolve any other conflict in good faith, including by amendment. Equally important: confirm that the plan permits what is being promised. Many plans expressly defer to a separately negotiated definition of “cause” in an individual agreement, which means a bespoke cause definition will govern. But you only know that by reading the plan, not by assuming it.
For contractors, the option is almost always nonqualified
Here is a trap that is easy to fall into and expensive to discover later. Incentive stock options (ISOs) carry favorable tax treatment, but by statute they can be granted only to employees. A true independent contractor, advisor, or consultant cannot hold an ISO. If the service agreement is silent on tax status and the grant is later entered into the cap-table system with the wrong setting, the company can end up with a grant that purports to be an ISO but cannot qualify as one.
The fix is trivial if caught at drafting: state in the agreement that the award is a nonstatutory (nonqualified) stock option and is not intended to qualify as an incentive stock option. If the same person is or becomes an employee, revisit the question, but do not let an unstated assumption decide a tax-sensitive classification.
Remember that “vested” does not mean “permanent”
Optionholders, and the people negotiating on their behalf, frequently believe that once an option is vested it is theirs to keep indefinitely. It is not. Almost every plan and award agreement imposes a post-termination exercise window — commonly three months for an ordinary departure, often twelve months for death or disability, and frequently immediate expiration for a termination for cause. Vested options that are not exercised within the applicable window expire. That is not forfeiture of unvested equity; it is expiration of a vested but unexercised option, and it surprises people constantly.
This interacts with the breadth of a “cause” definition in a way worth flagging during negotiation. If cause is defined broadly and open-endedly, a for-cause exit can do more than stop future vesting — under many forms it can also extinguish the right to exercise the already-vested portion. Whether that is the intended bargain is a business decision, but it should be a decision, not a surprise. Decide whether the service agreement should address the post-termination exercise period at all, or let the plan’s default control. If the agreement says nothing, the plan’s short window governs.
Understand early exercise and repurchase rights
Some option forms allow early exercise — the holder can exercise before vesting, acquiring shares that remain subject to repurchase by the company until they vest. This is a feature, not a bug, but it changes the vocabulary of the termination provisions. If a holder early-exercises and then leaves, the unvested shares are typically not “forfeited” in the way an unvested option is; instead, the company has a contractual right to repurchase them. The economics are similar, but the mechanism is different, and the documents should describe whichever mechanism actually applies.
Two details reward a careful read of the form. First, the repurchase price. Some forms repurchase unvested shares at the holder’s original exercise price (cost); others use the lower of cost or fair market value. These are not the same, and a service agreement that paraphrases the wrong one introduces an inconsistency the moment it is signed. If the service agreement is going to summarize the award agreement’s repurchase terms, summarize them accurately — or, better, do not restate them at all and let the award agreement govern, since restating a mechanic that lives elsewhere only creates a second place for it to be wrong. Second, the timing and process for exercising the repurchase right, which is usually a defined window after termination.
The IP side: assignment is necessary but not sufficient
Every competent invention-assignment agreement assigns to the company the inventions the person creates within the scope of the relationship. That handles the ordinary case. It does not, by itself, handle the case that causes the most heartburn in diligence: the person incorporates into the company’s product something they owned beforehand, or something they own independently, that is not a company invention.
Picture an engineer who builds a useful library on their own time, then drops it into the company’s codebase. The assignment clause does not capture that library, because it was not created within the scope of the engagement. If the company’s product now depends on it and the company has no license, an acquirer’s counsel will find the gap and make it the company’s problem.
The standard solution is an incorporated-IP or background-IP license. It says, in essence: if I incorporate any IP I own or control, and that is not assigned as a company invention, into a company product, I grant the company a broad license to use it. The license should be nonexclusive (the person keeps ownership of their background IP), but otherwise expansive — perpetual, irrevocable, worldwide, fully paid-up, royalty-free, sublicensable through multiple tiers, and transferable, covering the full range of exploitation rights (use, reproduce, modify, make derivative works, distribute, display, and so on). Pair it with a representation that the person has the rights necessary to grant the license and will not drop in third-party IP without securing adequate rights for the company. With that clause in place, the incorporation problem becomes a non-event.
Do not forget the survival clause
Invention-assignment and confidentiality agreements typically contain a survival section: a list of which obligations continue after the relationship ends. It is one of the least-glamorous provisions in the document and one of the easiest to leave stale. Every time a new substantive section is added — a license grant, a dispute-resolution provision, a fee-shifting clause — ask whether it should survive termination, and if so, add it to the survival enumeration.
This is pure hygiene, but it is the kind of hygiene that determines whether a clause is enforceable when it is actually needed, which is usually after the relationship has ended. A perpetual license that is not listed as surviving is at least arguably weaker than one that is, and the cost of adding a section number to a list is zero. Make it a habit: whenever a section is inserted, check the survival clause in the same edit.
Dispute terms: governing law and venue are different things
Governing law and venue are routinely conflated, and they are not the same. Governing law tells you whose substantive law interprets the contract. Venue (and forum selection) tells you which courts hear the dispute. It is entirely normal — and enforceable — to choose one state’s law to govern while requiring litigation in a different state’s courts; the chosen forum simply applies the chosen law. So a contract can be governed by the law of the state of incorporation while requiring suit in the company’s home county, and that is a deliberate, defensible combination rather than a drafting error.
Decide, too, where the enforcement provisions live. A company that uses a separate invention-assignment agreement may want its venue, injunctive-relief, and fee-shifting terms in that agreement, in the main service agreement, or in both. The trade-off is scope: a venue clause that appears only in the invention-assignment agreement does not, by its terms, cover a dispute that arises under the service agreement. To have the same forum, injunctive relief, and fee-shifting apply across the whole relationship, mirror the language in both documents rather than assuming one carries the other.
Two enforcement provisions are worth a deliberate choice. Injunctive relief — an acknowledgment that breach of confidentiality or IP obligations causes irreparable harm and that the company may seek an injunction without posting a bond — is standard and usually uncontroversial. Fee-shifting is more of a negotiation. A mutual “prevailing party recovers reasonable attorneys’ fees” clause is common and tends to be the more enforceable formulation; a one-sided clause favoring the company is more aggressive and, in some jurisdictions, will be applied reciprocally by operation of law regardless of what it says. Pick the posture intentionally.
Match the document’s voice and watch the small words
A clause can be substantively perfect and still read like it was bolted on, because it does not match the document’s voice. Many invention-assignment agreements are written in the first person — “I agree,” “I grant,” “I will not.” A venue or fee clause dropped in from a third-person template (“each party submits,” “the parties waive”) sticks out and, worse, can introduce a subtle ambiguity about who is bound. Conform inserted language to the surrounding voice. It costs nothing and it signals that the document was drafted, not assembled.
Small words carry real weight elsewhere, too. “Bi-weekly” technically means both “every two weeks” and “twice a week,” and while the accompanying dollar figure usually resolves the ambiguity in a compensation clause, spelling out “every two weeks” removes all doubt at no cost — provided you make the same change everywhere the term appears so the documents stay consistent. Punctuation choices, defined-term capitalization, and consistent cross-references are not pedantry; they are the difference between a document that interprets itself and one that invites argument.
Use redlines and version control like you mean it
Finally, a process point. When you revise a negotiated document, produce a clean version and a redline against the prior draft, and version the filenames so everyone knows which draft they are reading. The redline is not just a courtesy to the other side; it is a control on your own work. It is the fastest way to confirm that you changed exactly what you intended to change and nothing else — that a small edit to one paragraph did not silently truncate the next one, that a defined term you introduced is used consistently, that the survival clause picked up the new section. Reading your own redline before sending it catches more errors than re-reading the clean draft, because the redline shows the deltas the eye would otherwise skip.
A short closing checklist
When finishing a contractor or executive equity grant, walk back through it once with these questions in mind. Is every special pool of equity a defined term, used consistently? Does the vesting schedule survive contact with the plan, the award agreement, and the cap-table software? Is the forfeiture-versus-vested boundary explicit? Do the service agreement and the plan agree on what controls? Is the option correctly classified for the recipient? Has the post-termination exercise window been addressed, or consciously deferred to the plan? If early exercise is possible, do the termination provisions describe repurchase accurately — or stay silent and defer to the form? Is there a background-IP license behind the assignment? Was the survival clause updated for everything new? Are governing law and venue distinguished, and are the enforcement terms in the documents where they need to be? And does every inserted clause match the document’s voice?
None of these questions is hard. The discipline is in asking all of them, every time, before the draft goes final — because the cost of asking is a few minutes, and the cost of not asking is a dispute about a deal that everyone thought they had already closed.
For related drafting practice see our posts on the compliant first hire — offer letter, PIIA, and stock option grant, the PIIA explained, and the broader startup hiring and equity paperwork playbook.
If you are reviewing a contractor or executive grant package and want a second set of eyes on the alignment between the service agreement, the plan, and the award documents, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
— John
