Get expert advice on every topic you need as a small business owner, from the ideation stage to your eventual exit. Our articles, quick tips, infographics and how-to guides can offer entrepreneurs the most up-to-date information they need to flourish.

Subscribe to our blog

Why skipping employment contracts could put your startup at risk

Posted by Grace Townsley

April 14, 2023    |     5-minute read (868 words)

So you’ve got your startup’s business plan set, you have an onboarding process planned out, and you’re just about ready to hire your next critical team member. What’s the first thing you should do? Draft an employment contract that protects your growing startup and the next member of your team.

Before you start showing your new hire around the Slack channels, it’s essential to make sure you cover all your legal bases. Because a strong employment contract, signed on day one, sets your startup (and your employees!) up for a safe and successful partnership. 

Today, creating a clear and comprehensive employment contract isn’t just a nice idea — it’s critical for any business aiming to scale. 

Unfortunately, many startups and small businesses use offer letters to define roles, but skip creating actual contracts altogether. That kind of oversight leaves growing companies open to significant risk — and can lead to a lack of clarity among both employers and employees. 

What is an employment contract?

Before we jump into the details of crafting a strong employment contract and developing an effective onboarding process for your startup, let’s define our terms.

An employment contract is an agreement between two parties (you and your new employee) that outlines the terms of their new job. It serves as a legally binding document, signed by both parties, that frames the expectations of the job before the employee starts.

Many startups skip this critical step because they don’t have the time to draft a contract, the money to invest in a business lawyer, or because they think an offer letter alone protects them from liability. But in reality, taking the initiative to create a strong contract can protect your fragile venture, and bring security and peace of mind to your new hire. 

How can a strong employment contract protect your startup?

Startups face an uphill battle to success. A full 20% of businesses fail in their first year, and only 18% of first-time founders launch a successful company! A strong employment contract protects you from the risk of an employee quitting to launch their own competitive venture, poaching customers, or otherwise destroying what you’ve built. 

It also offers security and clarity for both employers and employees. New startups often hire in-demand talent from within their industry. These hires are likely leaving a high paying job for a more risky, lower paying one, with no guarantee of success. Your employment contract gives them some security by outlining their expected scope of work, salary details, vacation time, and severance package if they quit or are laid off. 

This small extra step can give your high-value talent a bit more peace of mind when joining your startup. And that allows you to attract stronger talent from the beginning. 

Plus, adding an employee contract to your onboarding process minimizes your legal disputes

When your company is young, even a small legal dispute can lead to financial disaster as the legal fees, and reputational damage, grow. But drafting a clear and careful employee contract protects your startup from damaging legal disputes by outlining exactly what each party can expect from the employment arrangement. 

Here are a few key elements of an employee contract that protects your startup from costly legal battles:

Clarity on employment terms. Your contract should define your employee’s pay, job duties, benefits and termination provisions.

Limitation of liability. In the event of a dispute, this provision limits your startup’s financial damages and minimizes the consequences of a lawsuit. 

A dispute resolution process. Your employment contract can also include a process for resolving disputes — away from court. Typically, contracts require that all disputes go through mediation or arbitration first, where they can be resolved faster and more cost-effectively. 

A well-written employment contract can even protect your competitive edge

Without a contract in place, your employees may believe they can keep their intellectual property — and use it to start their own competing business.

For example, if your lead product developer uses the ideas they developed for your startup to launch a competing company, you have little legal ground to stand on — and that idea, if well executed, can knock your startup out of the market. 

But by requiring every new hire to sign an employment contract that clarifies their rights to their intellectual property, you can protect your edge and keep the best ideas in-house. 

If an employment contract isn’t a part of your startup’s onboarding process, why wait?

To add an employment contract to your startup’s onboarding process, it’s best to start by consulting a professional who understands both contract law and how startups operate. They can help you follow the regulations in your state and industry, and draft a contract that protects you and your employees. 

Once you have an employment contract in place, have every single new hire sign the contract when they receive their offer letter. That way they’re clear on the expectations of their role from the moment they’re offered the position. 

For added protection, you can also ask your existing employees to sign your new contract. This extra layer will give your startup an even greater chance of long-term success. 


Grace Townsley
Grace Townsley

As a professional copywriter in the finance and B2B space, Grace Townsley offers small business leaders big insights—one precisely chosen word at a time. Let's connect!

Learn how we can put more time back in your day.