‘Caution’ is not exactly a word we associate with budding entrepreneurs and founders. Many of whom thrive on passion, uncertainty, and taking calculated risks. But before you turn that spark of a great idea into a reality, it’s wise to pause and consider if you’ve covered all your legal bases. To set yourself up for optimal success, it’s critical that each new venture is built on a solid legal foundation so you’re ready and prepared for the challenges and curveballs.
If you're getting ready to launch your startup, make sure you’re equipped with these crucial legal documents.
1. Business Formation/Incorporation Documents
One of the first crucial decisions you should make when starting a business, is the type of business structure your venture will have in place. Thinking you can get by as a sole proprietorship is often a reckless mistake. Founders who fail to have a separate legal entity for your new venture can find themselves at risk of incurring huge income tax bills and most importantly, find themselves personally responsible for the legal liabilities of their business.
The process of registering your business is becoming increasingly simplified all over the world. The most difficult part of your decision is choosing the type of structure best suited to your business needs and the best place to register your business. The type of business structure you choose will depend on the size of your business, your future goals and tax considerations. For a comparison on business structures, read our guide here, and for choosing the best place to incorporate your business, see here.
2. Founders' Agreements
If your startup has multiple founders or founding parties, it is crucial that every party is on the same page in terms of expectations, obligations and responsibilities. Many founders make the critical error of failing to put together a Founders’ Agreement, especially when opening a business with family and friends. A Founders' Agreement defines the working relationship of all parties to a business venture and outlines how disputes will be resolved. Ultimately preparing your business to weather potential disagreements among founders in the future. Your Founders' Agreement should include:
- A division of what percentage of the business each founder owns
- A division of responsibilities for operating and managing the business
- An explanation of how a founder may be removed from the business (often via the decision of the other founders)
- The treatment of a leaving founder’s shares in the business
- A template for how to handle any disagreements over the day-to-day running of the business or any big decisions regarding the future of the business
- Any expectations set forth for the founders in terms of involvement or financial investment in the business
- What percentage of the profits each founder should expect
This document will help prevent surprises down the road, especially those that could result in a substantial dispute between you and the other co-founders. The legal document also provides vital protection to all of you as you commit your time, money, and other resources to the business.
3. Bylaws or Governing Documents
Founders often assume that they can "figure things out as they go along" when it comes to operating the business. Often the focus is on the big picture ideas and plans, which can cause founders to lose track of day-to-day operational workings of the business.
Every business should have governing documents or bylaws that set out the internal rules of the business and should include information like:
- How to settle disputes between founders, shareholders, or upper-level members of the management team
- How to select leadership within the company, including who has the final say in specific decisions or how the company will select its governing board
- What rights and responsibilities are held by shareholders of the company
- What voting percentages are necessary in order to make certain critical decisions for the company, including selecting new leadership, making stocks available publicly, or selling the company
It's important to set up your bylaws soon after establishing your company. These vital documents can go a long way toward helping your company run smoothly, managing expectations, aligning all parties’ incentives and settling disputes.
4. Intellectual Property Assignments
It is imperative that every start-up has complete ownership of all intellectual property assets necessary to its business in writing. This is even more true for technology companies wanting to attract funding, as investors are mainly looking at the value of your IP portfolio.
When looking at IP assignment agreements, there are two types that you should consider:
- Technology Assignment Agreement - this is used where intellectual property was created before the startup was formed. In this instance, founders/developers who create IP can either retain ownership of their IP rights or sell those rights to the company in exchange for money or equity.
- Invention Assignment Agreements - this agreement should be given and signed by each founder, employee, and independent contractor. This agreement confers to the company IP ownership of any work created in the course of employment.
5. Non-disclosure Agreements
Non-Disclosure Agreements protect your company’s ideas, intellectual property and any information you don't want to disclose to the general public, including financial data, sales, product and marketing information. This document should be used whenever you give access to confidential information to any party including employees, prospective employees, contractors, vendors and potential investors.
Your Non-disclosure Agreement should specify:
- What information is confidential
- How confidential information should be handled
- The period of time confidential information will be disclosed and maintained
6. Employment Contracts and Contractor Agreements
As you start to build a team, employment documents become crucial in managing expectations and protecting the companies and your employees/contractors interests from the outset. Employment documents include:
Employment contracts. Employment contracts lay out the details of your expectations for your employees and typically include:
- Terms of employment
- Expectations
- IP ownership
- Company policies
- Reporting structure
Contractor agreements. At the beginning of your venture, you may not be ready to employ regular staff and may instead use the services of independent contractors or freelancers. Similar to employee agreements, contractor agreements should establish the duties a contractor will take on for your business. Often, the contractor represents your business to your customers, and you want the same quality of work from your contractors that you would expect from your employees. A clear contractor agreement will establish exactly what you expect of those contractors, what you will offer in exchange for their services, and the terms of their dismissal. Your business should have a standard contractor agreement that you can easily alter based on specific contracts or specific contractors' needs.
7. A Shareholders Agreement
Once your business starts to take on private investments, you will need Shareholder Agreements to dictate shareholders rights and their responsibilities to each other. Shareholders agreements should set out:
- The rights and obligations of each shareholder of the company
- When and under what circumstances shareholders can exercise their rights
- How Shareholders may sell or transfer their shares, if they decide to do so
- How decisions relating to fundamental corporate transactions should be undertaken
- Basic guidelines for corporate governance (i.e. Board mechanics)
A well-drafted Shareholders Agreement can go a long way in preventing potential conflicts that may not always be foreseeable when the Shareholders Agreement is first adopted.
8. Website Terms of Use and Privacy Policy
A business website is a necessity for any business and a clear, well drafted Terms of Use and Privacy Policy will serve you well. Your website’s Terms of Use is an agreement between your company and any user of the site and should include:
- Limitations on how users can use the site
- Disclaimers and legal liability limitations concerning any information gathered from the website
- Copyright protection
- Jurisdictions where a legal dispute can be brought
Your privacy policy governs what information you will collect from your customers and how you will use that information. Most jurisdictions have laws governing the collection and use of information and it is important that your privacy policy complies with all relevant local and sometimes international regulations.