Founders and early employees leaving a California startup: the employment law

You are probably an employee too

Owning shares and sitting on the board do not stop you from being an employee. If the company pays you to work, the Labor Code protects you like any other worker. Losing your job and losing your shares are separate events, governed by separate documents.

Final pay

If the company ends your employment, all earned wages, including unused vacation, are due on your last day. If you quit with at least 72 hours notice, pay is due on your last day. If you quit without notice, it is due within 72 hours. A company that willfully pays late can owe one day's wages for each day of delay, up to 30 days.

Noncompetes

As an employee, a noncompete is void. The exception is ownership: if you sell all of your shares, or the goodwill of the business, you can agree not to compete in the area where the business operated. See noncompetes in California.

Who owns what you built

Most startups have every employee sign an invention assignment agreement. Labor Code section 2870 limits it. The company cannot claim an invention you developed entirely on your own time without its equipment, supplies, facilities, or trade secrets, unless the invention:

• relates to the company's business, or to research and development the company is actually doing or can show it plans to do; or
• results from work you did for the company.

Section 2872 requires the company to give you written notice of this limit when you sign the agreement. If there is a dispute, you have to prove your invention qualifies. For an AI founder, a side project that uses the same models, data, or code as the company will usually fall inside the assignment.

Equity is a contract question

What happens to your shares and options is set by your stock purchase agreement, option plan, and grant notice. Leaving often lets the company buy back unvested shares, and starts a deadline to exercise vested options. Many plans give 90 days, but your plan controls. Read those documents before you resign or sign anything.

The separation agreement

A departing founder is often asked to sign a release in exchange for severance, accelerated vesting, or a buyback price. California sets rules for these agreements. See severance agreements in California.