As an entrepreneur, starting your business journey there is nothing more exciting than forming your business entity. However, to protect the business and ensure its long-term success, a strong foundation for your startup is needed.
When your entity comes into existence you need to ensure that proper structures and safeguards are laid down to protect your business interests. Legal documents play an absolutely important role in serving this purpose. Through the course of this article, we will understand the various important legal documents that every startup should be aware of.
1. Founders’ Agreement
Businesses are often not the product of a single person’s efforts. Usually, where there is more than one founder of a business, there must be a clear understanding between these founders as to what their rights and responsibilities are.
A Founders’ agreement serves this exact purpose. It is a contract that lays down matters including the rights, obligations, and ownership stake of each founder. It essentially acts as a blueprint for the partnership a collaboration of the founding members of the business.
In the absence of a founders’ agreement, future disputes among the co-founders often pave the way too time-consuming court cases and litigations which in turn disrupt the business and its reputation.
2. Incorporation Document:
Incorporation documents officially make your business a legal entity. It gives your business standing in the eyes of the law as a separate entity and accords you with limited liability protection. Depending on which part of the globe you have set up your business, the name and procedure for acquiring these incorporation documents will vary.
Usually, you are required to fill up certain prescribed forms and file them along with supporting documents to the concerned government authority in your country. These documents contain certain fundamental information about your business such as your company’s name, a unique identification number for your company, the purpose of the business, shareholding, registered office address, etc.
Without a proper incorporation document, in the eyes of the law, you are just an individual doing business on your own accord. Thus, the absence of a properly obtained incorporation document will expose you and the other founders of your business to personal liabilities.
In addition, without a properly incorporated business, you will find it hard to raise capital, enter into contracts with vendors/service providers and protect your business’ intellectual properties.
3. Non-disclosure Agreements (NDA):
An NDA is used to protect information about your business that is confidential. While conducting business you will transact with employees, vendors, and independent contractors. You may need to give them access to some confidential information for them to perform their duties. To ensure that such information is properly protected and is not misused by such parties, startups often use an NDA. The scope of an NDA would differ according to the business and circumstances, but commonly they are utilized to protect trade secrets, proprietary information, business strategies, etc.
NDAs secure your business by ensuring that confidential information is not mishandled by the involved parties. Without such an agreement your business runs the risk of facing damaging consequences in case of any unauthorized disclosure of confidential information.
The results can be devastating for a startup as disclosure of such information to third parties can result in your business losing your competitive advantage.
4. Employment Agreements:
Employees are the life and blood of every business. The founders of the business would need to procure talented human resources for the business to thrive. Hiring the brightest people from the field who are the best fit for your company is essential to the growth of any business. Just as essential is the relationship of your business with its employees.
An employment agreement defines the relationship between the company and the employees while laying down the terms of employment. It usually covers all significant aspects such as job responsibilities, remuneration, benefits, leave policy, and other concomitant matters.
Lack of a clear employment agreement can result in employee disputes which in turn disrupts the functioning of your business. Employment laws differ in different countries. Therefore, you must seek legal advice and invest in the drafting of a thorough employment agreement ensuring its legal soundness and compliance.
These days, it is imperative that companies doing business have a strong presence online. It helps businesses to grow their customer base and also to reach out to those people who otherwise are not in the physical proximity of your business location. Customers prefer availing the products or services of a company from the comfort of their homes and so every startup should have a good and easy-to-use website.
6. Independent Contractor Agreement:
Newly set-up businesses often do not have enough funds to have full-time employees to perform all the jobs that need to be done. They instead rely on freelancers or independent contractors to get these works done.
An independent contractor agreement clearly defines the relationship between the Company and the service provider and covers matters including their scope of work, payment, intellectual property rights, etc.
Such independent contractor agreement becomes all the more important when the work that you delegate to such freelancers or service providers involves confidential information about your business. Unless there is a proper agreement binding the two parties there are always chances of disputes cropping up regarding issues such as compensation for work, ownership of the intellectual property in the work deliverables, handling of sensitive information, etc.
The relationship and the legal obligations that a company has towards a person will vary drastically depending on whether the said person is a full-time employee or an independent contractor. Full-time employees of the business are entitled to many welfare benefits. This is another reason why newly set-up businesses, that have limited funding, prefer freelancers / independent service providers. The lack of a binding independent contractor agreement, defining the relationship between the parties can lead to legal and regulatory hurdles about the status of the employment.
7. Investor Agreement:
You will need more funds to expand your business. Initially, these funding requirements are met using a bank loan or other means of debt funding. However, as the business grows, so does your funding requirement. One of the most commonly practiced is equity investments. Startups that can perform well attract investors. These investors bring in capital in return for a certain percentage stake in the company. An Investor Agreement is essentially a contract between the startup and such an investor.
Such agreements are also popularly referred to as Subscription Agreements or Shareholders Agreements. They define the relationship between the startup and the person who has invested money into it and also state with clarity matters such as the rights and responsibilities of the investor, the terms of investment, decision-making powers, etc.
In the absence of such a well-drafted agreement, there can be potential disputes between the startup and its investors in matters of ownership stakes, business decisions, and exit strategies. More importantly, if such a dispute does arise, it will be very hard for our business to attract other investors.
8. Intellectual Property (IP) Assignment:
IP assignment contracts are used to transfer the ownership of intellectual properties to the startup. This can be about patents, copyrights, trademarks, etc. As far as a startup is concerned protection of their IP rights is very important as it helps the business maintain its competitive edge in the market.
Using a well-drafted IP Assignment the founders can confer on the startup the IP rights. This ensures that the unique and innovative idea behind the formation of the business is well protected and is duly vested in the startup.
It is also a commonly seen theme that investors are hesitant to put their money into the business if there is no IP assignment conferring the ownership to such rights to the startup. Thus such agreements help to boost investor confidence.
Additionally, IP rights form a major part of the total value of a startup business. An IP Assignment is conclusive proof of the ownership of the entity to such assets. These contracts positively impact the valuation of the startup at the time of funding rounds and help to ensure that the founders are not diluted out easily.
Such IP rights are often the efforts of many people who then join to form the business. An IP Assignment lays down the ownership and rights associated with these assets and thereby helps to avoid misunderstandings and disputes between the founders in the future.
9. Compliance Documents:
Depending on the field of your business and the jurisdiction in which your startup operates, it will have multiple obligations to fulfill in terms of legal compliance. Compliance documents include the various licenses and permits you will need to start and continue operating your business. Additionally, it also comprises the various regulatory filings that a business needs to file with various governmental authorities. The exact type of compliance documents are industry-specific and will also vary according to the area where your business operates.
Your business could face serious legal consequences should you fail to comply with regulatory obligations and maintain proper compliance documents. Apart from penal actions such as fines, the individual within your organization who was responsible to file and maintain these documents may also be held liable personally. Your business may also potentially lose its permit to carry out the business.
An understanding of the pertinent legal aspects of business is a prerequisite to success. Being well-prepared for all legal requirements and challenges ensures that your business is set up for long-term success and sustainability. In the jurisdiction in which you set up your business specific legal requirements may differ. Irrespective of the industry in which the business is operating, the legal documents discussed above are of vital importance. Therefore, every startup must consider these documents.
By having well-drafted legal documents in place, startups can, to a large extent, minimize the various risks involved in running a business. These documents help protect the interest of the business as well as that of its founders. Compliance with all legal and regulatory requirements is ensured by having thorough legal documentation in place. Consequently, unnecessary misunderstandings and disputes can be avoided.
Having said this, it needs to be considered that the various documents discussed above are complex. The drafting of such documents requires expertise and skill. Therefore you must approach a legal professional who after understanding the needs of your business will help you draft these documents.
While the idea of investing time and resources in such legal documents may seem daunting to an entrepreneur, it is absolutely important in ensuring that the right legal environment is set up for your business. These documents are the buttress of strengthening your business and keeping it from becoming vulnerable at any point as it grows and thrives in the extremely competitive business field.