We examined the prevalence of embryo malpositions and deformities in relation to total mercury (THg) and selenium (Se) concentrations in American avocet (Recurvirostra americana), black‐necked stilt (Himantopus mexicanus), and Forster's tern (Sterna forsteri) eggs in San Francisco Bay (CA, USA) during 2005 to 2007. Overall, 11% of embryos were malpositioned in eggs ≥18 d of age (n = 282) and 2% of embryos were deformed in eggs ≥13 d of age (n = 470). Considering only those eggs that failed to hatch (n = 62), malpositions occurred in 24% of eggs ≥18 d of age and deformities occurred in 7% of eggs ≥13 d of age. The probability of an embryo being malpositioned increased with egg THg concentrations in Forster's terns, but not in avocets or stilts. The probability of embryo deformity was not related to egg THg concentrations in any species. Using a reduced dataset with both Se and THg concentrations measured in eggs (n = 87), we found no interaction between Se and THg on the probability of an embryo being malpositioned or deformed. Results of the present study indicate that embryo malpositions were prevalent in waterbird eggs that failed to hatch and the likelihood of an embryo being malpositioned increased with egg THg concentrations in Forster's terns. We hypothesize that malpositioning of avian embryos may be one reason for mercury‐related hatching failure that occurs late in incubation, but further research is needed to elucidate this potential mechanism.