Hello, Reader. If you’ve been following along with this series, you’ve already tackled the big legal questions for launching your startup: leaving your 9-to-5, setting up your business entity, and divvying up ownership of your new company. (If you’re just joining us, no worries—catch up on Parts 1, 2, 3 and 4 whenever you’re ready.)
Now, let’s get into the legal side of building your early team. Whether you’re hiring your first employee, bringing on a contractor, or enlisting the wisdom of an advisor, it’s crucial to understand the differences—and the legal implications—of each role.
So, grab a coffee (or a glass of wine, no judgment here), and let’s break it down.
The Legal Categories
Employees (W2): The Work Fam
When it comes to hiring, we often use “employee” as a generic term. These are the folks who show up every day (or log in remotely, because it’s 2025) and work at [insert amazing startup name] . But “employee” means something quite specific from a legal perspective, and it matters a lot.
Having “employees” means you have to set up payroll, and you’re responsible for withholding taxes and perhaps providing benefits. You have to register with more than one government agency to do all this. And it goes without saying you have to pay the legally required minimum wage. Taking on an “employee” is a leap in maturity and administrative burden for a startup, and it’s hard to undo.
Contractors (1099): The Hired Guns
Early-stage startups often start by hiring contractors for this exact reason. You don’t have to worry about withholding taxes or providing benefits. They invoice you for their work, and you pay them like any other vendor. Contractors are the freelancers. You make less of a commitment to them and them to you.
It’s illegal to treat a contractor like an employee, though. You can’t hire a contractor, and then have the same demands as you would with an employee. Put another way, you can’t hire someone you expect to work like an employee but dress them up like a contractor to avoid the legal entanglements of formal payroll.
So, what’s the right thing for your situation? When’s the right time to take the leap into being an “employer” in legal terms? It often comes down to whether you’re trying to bring on one person or you’ve got a plan to bring on many people (or at least several).
Why hire a W2 employee?
Control: You get to set their schedule, define their responsibilities, and oversee their work.
Culture: Your employees build the culture of your company, from Slack emojis to office potlucks. This is your work fam in the making.
Tax Deductions: Many payroll expenses can be deducted. Once you reach a certain critical size, that can take the edge off the pain of setting up payroll.
Why hire a 1099 contractor?
Flexibility: They work independently. You expect them to get things done without a lot of management. If they don’t, you terminate the contract.
Low-friction: No benefits, no payroll taxes, less bureaucracy.
Low-commitment: Just pay for the work you need. It’s more of a business transaction than a work marriage.
The Roles on Your Team
So, how do these legal categories apply to the roles you need on your early team? Let’s talk about it using a few categories:
advisors
fractional executives
early workers
Advisors: The Wise Council
Advisors are the Yoda to your Luke Skywalker. They’re not employees or quite like consultants in the traditional sense. They’re your guru. In exchange, they often receive equity or a small fee.
Nevertheless, it’s important to set clear expectations about what they do and what they’ll get for it. Founders often use an Advisor Agreement for that purpose, but it is a consulting agreement or independent contractor agreement in another name. Advisors are generally 1099s.
Fractional Executives: Part-time Cofounders
By fractional executives we mean people you want as a leader or lynchpin of your company’s early days but who aren’t willing to dive in all the way. It’s still a side-project for them. Often these are part-time COOs or part-time VPs of Marketing/Sales. They’re people with industry-specific expertise you really need somehow someway, and they’re willing to give it a shot. Probably their pay is performance based or maybe just equity subject to vesting conditions.
In the end, these are likely to be 1099 contractors. You don’t want to create payroll for this one person. They aren’t guaranteed minimum wage. You’re hoping they deliver, but it’s a more loosely coupled relationship than employer-employee.
Early Workers: Your First Full-time Relationships
We use the word “worker” here intentionally. When you’ve got a plan that you need to implement you need labor. (It might be highly skilled labor.) This might be your first software developers or your first lab scientists.
These early workers might need to be employees. You are going to exert more control. The quantity of their work feels more closely tied to the output you need than it might for an advisor or a fractional executive. It might be time to grow up and become an “employer.”
We hope this helps orient you, but we definitely haven’t covered every scenario here. If you’re feeling overwhelmed, don’t sweat it. Join us for office hours, and we’ll help you navigate the legal labyrinth of early hires. Until next time, keep building, keep dreaming, and remember: even the mightiest oak was once a little nut that held its ground.
Cheers,
The Touchstone Team
P.S. Stay tuned for the next installment, where we’ll dive into the wild world of equity compensation. Spoiler alert: it’s not just about handing out stock options like candy.
Comments