Startup’s Guide: 5 Agreements every Entrepreneur shouldn’t start without

Being a startup entrepreneur we have to indulge into many things simultaneously. At one time we are looking into product development at other instance we are looking into sales & marketing. While we are caught up in doing so many things we often overlook to safeguard ourselves legally. Legal implications could be very high at times especially during the crucial period of your startup, so utmost care should be given in dealing with such issues.

I’ll be briefly covering some very important agreements that should be handy with you. I would also suggest involving good legal attorneys to help you create these agreements according to state and central (federal) laws. These agreements would also create a base for future negotiations with co-founders, investors as well as employees.

Employment Agreement: This is the agreement is between your company and every employee that will be inducted into your company, including its founders. This is also important so as to develop a healthy work environment for your company. This agreement generally establishes the rights and obligations of employees. Some key aspects to keep in mind would be it at least has an IP protection clause, a non-compete clause and a non-solicit clause. Other guidelines as per applicable law such as sexual harassment at the workplace, trading in securities, prevention of corrupt practices etc. must also be included.

Founders’ Agreement: Well you can think of it as a ‘pre-nuptial agreement’ with your co-founders. In general, this agreement should at least be able to describe:

1. Who gets what % of the company and what is the founder’s vesting schedule (if any)?
2. If one founder leaves, does the company or other founders have rights to buy back that founder’s share and at what price?
3. What are the roles & responsibilities and how much time commitment is expected from each founder?
4. What asset or cash is contributed or invested by each founder?
5. How are the key and day-to-day decisions of the business to be made and by whom (the Board, the Director or the CEO)?

Well there are a lot of things that can be covered in this agreement to maintain a healthy founding team.

Non-Disclosure Agreement (NDA): This at times is also referred to as confidentiality agreement, confidential disclosure agreement or secrecy agreement. The purpose of this agreement is to describe the nature of the information that is or may be deemed ‘confidential’ by you. Also, it precludes either party from disclosing such confidential information to any third party before, during or after their transactions with the other party or parties. Depending on the structuring of the agreement it can be mutual or unilateral.

Non-Compete Agreement (NCA): The broader purpose of this agreement is to prohibit the other party to enter into or engage or commence any activity, trade, vocation and profession which is in direct competition to you. The legal validity of the agreement generally is for a certain period of time and may vary as per jurisdiction and is invalidated after this period. A lot of employers insist on having this signed by a prospective employee as it prohibits the latter from leaving with the company’s secrets and business practices and start working or creating a competing organization.

Shareholders’ Agreement (SHA): This agreement provides a mechanism to regulate transfer of shares of your company. In general it would cover restrictions on transfer of shares (right of first refusal, right of first offer), the forced transfer of shares (tag-along rights, drag-along rights) and nomination clauses with respect to directors on board and veto rights. Though it constitutes additional rules to your Company’s Law, but it is strongly suggested to include such provisions in your company’s bye-laws (generally referred to as Articles of Association).

Though there are many other agreements that you need to be aware of vis-à-vis Share Purchase Agreement (SPA), Intellectual Property Assignment Agreement, Licensing Agreement etc. These are the most basic ones that every Entrepreneur should know. Moreover, if you are planning to fundraise for your startup investors would vouch for at least a Shareholder’s Agreement (SHA) and Share Purchase Agreement (SPA) in place.

My personal word of advice would be to execute at least a Founders’ Agreement and incorporate a company with some key aspects of Shareholders’ Agreement in your Articles of Association before you start working dedicatedly on your idea. This way you will have peace of mind, in terms of your idea’s security and transparency among your co-founders. Hence you would concentrate more on actual business and related issues.

Stay tuned for more detailed articles on these agreements with which I would try to attach some drafting templates to help you get started.

Image Source: Wikipedia, the free encyclopedia
Reposted from my blog: Startup’s Guide: 5 Agreements every Entrepreneur shouldn’t start without

Catch me on Twitter: @vipulmeehnia

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