Founders’ agreements often include stipulations regarding stock ownership, management roles, decision-making, conflict resolution, and exit alternatives. ~ Andrew Priobrazhenskyi, CEO and Director, Discount Reactor
To help startups navigate the complex world of legal contracts, we’ve gathered insights from 13 experienced professionals, including managing attorneys, CEOs, and co-founders. From a shareholder’s agreement to a founders’ agreement, discover the essential contracts that can safeguard your startup’s interests and ensure its success.
- Shareholder’s Agreement: Protecting Stakeholders
- Employment Contracts: Ensuring Stability
- Operating Agreements and Bylaws: Startup Foundations
- Non-Disclosure Agreements: Safeguarding Confidentiality
- CI&IAs: Assign Creative Work to the Company
- Contractor Agreements: Avoiding Compliance Violations
- Non-Compete Agreements: Safeguarding Business Assets
- Terms of Service and Privacy Policies: Internet Startups
- Lease Agreements: Protecting Startup Property Interests
- Intellectual Property Assignment: Ensuring Ownership
- Stock Purchase Agreements: Setting Acquisition Terms
- Partnership Agreements: Startup Relationship Management
- Founders’ Agreements: Defining Founder Relationships
Shareholder’s Agreement: Protecting Stakeholders
With finances, startups are usually the result of a joint investment effort that involves anyone from friends and family to work and business colleagues, as well as individual and institutional investors.
With a shareholder’s agreement in place, a startup team can clearly define the liabilities and rights of each stakeholder. This agreement will prove its worth when the startup takes off, and everyone clamors for their share of the pie. It also defines the steps to be taken when stakeholders decide to disassociate themselves from the organization.
Employment Contracts: Ensuring Stability
Since most employees are considered “at-will” by default, they have no obligation to stay with you or give advance notice. Unfortunately, startups are at their most vulnerable in the beginning. While losing one employee in a growing, revenue-stable company of 20 employees might not hurt as much, the stakes are much higher when you’re still in the pre-launch stages with a minimal team.
Startups can protect themselves by building employment contracts that ensure employees stay with them for a specified time period. These contracts protect the startup while also attracting better talent. Many great employees want the job security that a contract provides rather than worrying they might lose their job tomorrow.
Operating Agreements and Bylaws: Startup Foundations
I believe startups need to protect themselves with clear legal documents. One essential document is the operating agreement for an LLC, which outlines the startup’s management, profit-and-loss distribution, and each member’s rights and responsibilities.
By having this agreement in place, startups can prevent misunderstandings and conflicts among members. Similarly, corporations must have bylaws that define the roles of officers and directors and the rights of shareholders. By having these documents in place, startups can avoid wasting time and money resolving conflicts and focus on growing their business.
Non-Disclosure Agreements: Safeguarding Confidentiality
Any business, including startups, will have confidential information that should not be disclosed to anyone without the express consent of the business owner. This could be information pertaining to ideas or information that belongs to the business. If the information is revealed, it could cause harm, financial or otherwise, to the business.
A Non-Disclosure Agreement (NDA) prevents anyone with access to that information from disclosing it to any third party. The business owner can ask a variety of people, including employees, investors, creditors, or suppliers, to sign the NDA.
Breaking this agreement can cause severe consequences, including lawsuits, financial penalties, or ultimately, criminal charges. Every startup should cover themselves against loss by asking those with access to confidential information to sign an NDA to ensure that their confidential information remains confidential.
CI&IAs: Assign Creative Work to the Company
The acronym stands for Confidential Information and Inventions Assignment Agreement. This is a critical agreement for startups working with employees and contractors creating intellectual property.
It ensures that the creative and intellectual work is assigned to the company, and not in dispute. These agreements go under review the moment a startup wishes to change hands, restructure, or receive funding.
Contractor Agreements: Avoiding Compliance Violations
Securing a contractor agreement from the get-go protects startups from labor compliance violations. The agreement establishes that the contractor is an independent contractor and not an employee. Delineating between the two is crucial because there is a stark difference in employee rights and benefits. This clarification is crucial because the IRS has specific rules differentiating employees and independent contractors.
If a startup misclassified an employee as an independent contractor, it can face penalties for non-compliance or other legal nightmares that could bring down your startup business.
Non-Compete Agreements: Safeguarding Business Assets
Non-compete agreements are one of the most popular legal contracts used to protect startups. This type of contract prevents employees or contractors from working with a competitor and/or poaching customers.
It also prevents former employees from sharing confidential information about the business, such as trade secrets. Non-compete agreements can be especially beneficial for businesses that have valuable intellectual property or a unique product offering.
It is important to note that non-compete agreements differ from state to state and must be drafted carefully in order for them to be legally binding. Non-compete agreements can also be limited in scope and duration, which means that they cannot prevent someone from working with a competitor permanently.
Terms of Service and Privacy Policies: Internet Startups
Privacy policies define how a startup acquires, utilizes, and safeguards user data. These agreements, in my opinion, assist startups in defending their interests by defining explicit boundaries for user behavior and protecting user data from misuse.
Lease Agreements: Protecting Startup Property Interests
Lease agreements are important legal documents that help protect startups. A lease agreement is a written contract between two parties, the landlord and the tenant, which sets out the terms and conditions of renting property. This document outlines the obligations of both parties, such as rent payments and duration of occupancy, so that everyone’s rights are respected.
Lease agreements can be beneficial for startups because they provide protection from unexpected problems like late payments or unauthorized changes to the premises. The landlord will have the incentive to maintain good relationships with tenants because of the legally binding agreement that is in place.
Additionally, this document also allows startups to negotiate favorable terms upfront rather than dealing with issues after they arise.
Intellectual Property Assignment: Ensuring Ownership
An intellectual property assignment contract ensures that your startup owns all ideas, inventions, work products, and discoveries generated by your employees. This is especially pivotal when working with contractors because they often work for multiple companies at once.
Once signed, your employees are to assign their inventions to the startup, as well as disclose any ideas, other products, or discoveries made during their period of employment. This contract grants your startup total intellectual property ownership, so no one else can claim the rights to your properties or inventions.
Stock Purchase Agreements: Setting Acquisition Terms
A stock purchase agreement is one legal contract all startups need. This document essentially sets the terms for stock acquisition, including details like price, number of shares purchased, and date of sale. However, another key purpose is protecting both parties involved from unforeseen issues later regarding acquiring funds or closing on time.
Partnership Agreements: Startup Relationship Management
A partnership agreement is an absolute must, especially for startups, as they tend to be started by a group of friends with a great idea. A partnership agreement will outline the terms and conditions of the business partnership, including everyone’s roles, responsibilities, contributions, decision-making processes, distribution of profits, and more.
These are all things that must be worked out before you bring in further investment, hire employees, or conduct major business. And if you think you can put this contract off because you are friends or family, think again! Those can be the most difficult partnerships to maintain and mend. Just watch the Social Network or Succession to see what I mean!
Founders’ Agreements: Defining Founder Relationships
Founders agreements are contracts that specify the relationship between a startup’s founders. Founders’ agreements often include stipulations regarding stock ownership, management roles, decision-making, conflict resolution, and exit alternatives.
These agreements, I believe, serve to protect startups by outlining explicit expectations and obligations for each founder. They also aid in the prevention of disagreements by defining a structure for dealing with any problems that may occur among the founders.