5 Steps to a "Happy Ever After" Offer Letter

You have come to the point where you realize that you and your co-founders can’t do it all and you need to hire some employees. Your first new hire is as excited as you are, but she’s asked you for an offer letter. While your initial reaction may be “what a pain,” putting together a thoughtful offer letter is as important for your company as it is for your employee. When done properly, an offer letter avoids misunderstandings by providing details on key terms such as compensation, benefits, or conditions of employment. It should also identify the employee’s title and manager. Once accepted, an offer letter is binding and the company is on the hook to fulfill every obligation contained in it. This means it should be precise, and carefully worded.

Here are five tips for writing an offer letter:

Everyone should be “At Will.” Don’t imply that you are hiring for a specified period

You are going to want the flexibility to part ways with an employee at any time, for any reason, simply because things change and not everything works out. Poor word choices like, “you will be paid $100,000 for your first year of employment,” “you will get a $10,000 bonus after 3 years,” or “we want to hire you as a permanent employee,” could imply that you are committing to hiring your employee for a certain period of time (or even indefinitely). When describing salary, state how much she will get paid every month, the payment of which will be in accordance with the company’s standard payroll schedule. When describing any future bonuses, be clear that eligibility is contingent on continued employment. Most importantly, include the magic words “your employment with the company is at-will,” which, translated from legal speak, means that the company (or the employee) can end the employment relationship at any time and without notice.

Do specify every condition that must be satisfied

Once your new employee signs the offer letter, she is likely to assume that the job is hers. The reality is that before she can start working for you, she needs to satisfy certain conditions and your offer letter needs to say so. One such condition (which is true for every employee you will hire) is that she must prove she is authorized to work in the United States. Another key condition to include is that she sign a confidentiality and IP assignment agreement, a copy of which should be included with the offer. Such an agreement protects the company’s information and trade secrets, confirms that anything she creates or invents for the company is owned by the company, and often verifies that she doesn’t have any non-compete or non-solicit agreements that prevent her from working for you. If there are any other company-specific or job-specific conditions that must be satisfied, such as a background check or industry certification, the offer letter needs to describe them. If it doesn’t, tensions could arise if you insist on them later and your employee refuses or fails to satisfy the condition. Put another way, while the “at-will” language in an offer letter allows you the flexibility to terminate an employee, it isn’t going to protect you from your mistakes. Your employee may have left another job to come work for you or rejected another job offer, and if you can’t hire her or if you have to fire her because of a condition you failed to include with your offer, she could demand that you pay for your mistake because she relied on your offer letter to her detriment.

Most start-up employees will expect to see an equity award referenced in their offer letter. But simply saying “you will get a grant of 1,000 shares” is not likely to describe the full picture. Instead the language to describe any equity award should make it clear that awards are subject to (i) approval by the company’s Board of Directors, which is a requirement before any equity award can be granted (this approval is not always a “rubber-stamp”), and (ii) any conditions as specified by the company, which will cover any vesting or repurchase rights. By caveating the offer letter this way, you don’t need to include all the details and terms of the award, while protecting the company by signaling that the award has conditions and restrictions. If the employee wants to know more about the conditions of her equity award, she will ask you about them, so be prepared to share them. Similarly, there may be other items being offered to your employee that have caveats, such as repayment of a signing bonus or relocation expenses if the employee leaves within a certain period of being hired. Include these caveats in her offer letter, or at least include a qualifier that the conferral of the benefit is “subject to conditions as specified by the company,” or “is subject to the terms of the company’s policy.”

In the course of interviewing and hiring employees, a lot may be communicated orally and/or in email by a variety of people in your company. Some statements may have been unplanned (“revenue is up so employees should get healthy bonuses this year”), or just plain wrong (“no one ever gets fired unless they really screw something up”). It is important to include what’s known as an “integration clause” in your offer letter: “This offer letter and the agreements, policies, rules, and procedures referenced in it are our complete understanding regarding your employment with the Company and it completely replaces any prior oral or written communications on the subject." It essentially means that if it isn’t in the offer letter, it isn’t part of the deal.

Because you likely have a lot going on, you need to know if the candidate wants the job. The best way to find out is to include an expiry date in your offer letter. Typically, the offer letter gives a candidate 4 or 7 days to accept it by signing it and returning it to you, and the intervening period allows time for questions or further negotiations. Not including an expiry date can create more work for you, because you will need to formally revoke the offer if you want to move on and the offer hasn’t been accepted—save yourself this hassle and try to include one.

Remember, offer letters are a happy occasion! The company found a new team member and the candidate is being offered a new opportunity. Set up your offer letter right—with transparency, precision, and care—to set the stage for the “Happily Ever After” you and your employee are seeking.

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Sample scenarios are for illustrative purposes only

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.