Founders are usually focused on getting their startup off the ground in the early stages of development and tend to ignore the legal aspects of the business. It is very essential to have legal protection at the early stages of your startup. Startup founders may face legal issues in the areas of determining rights and shares of the partners, business documentation and intellectual property-law protection. It is highly important to have a legal framework in place that can mitigate risk and increase chances of success of the startup.
There are key legal agreements every startup must have in their developmental stages. The following are some of these legal agreements;
- FOUNDERS’ AGREEMENT
In a situation where a startup is operated by more than one founder, having a founders’ agreement is an essential requirement. A founders’ agreement is a legally binding contract, usually in writing, that outlines the roles, rights, and responsibilities of each owner in a business. A founders’ agreement is designed to protect each founder’s interests and to prevent conflict in the future. The agreement identifies potential risks and provides provisions to deal with them should they arise, clarifies each founder’s role in the business, provides a structure for resolving disputes among founders, provides clarity if and when a founder wants to enter or exit the business and signals to investors that you have a serious business.
- INTELLECTUAL PROPERTY ASSIGNMENT AGREEMENT
Intellectual property is legally defined as a work or invention that is the result of creativity to which one has rights and for which one may apply for a trademark, patent, copyright, or other appropriate protection to keep others from using it without permission.
An Intellectual property assignment agreement is a contract that transfers the rights to the intellectual property from the creator to another entity, such as a company. Founders/Employees sign this agreement to assign to the company, in advance, any ideas, products, or inventions related to the company business. This agreement can be in the form of a technology assignment agreement which assigns to a startup any intellectual property before the company is formed. It can also be in the form of an invention assignment agreement which assigns a new company ownership of any relevant intellectual property created by employees after the company is formed.
- VESTING AGREEMENT
Founders’ shares are often subject to a vesting schedule. In a vesting schedule, the shares vests in increments over four years; if the Founder leaves the company before the shares are fully vested, the company has the right to buy back the unvested shares at lower cost or the then fair market value.
Founder share vesting will reduce the possibility of a founder leaving and therefore increase commitment. More importantly, the shares returned will allow the company to retain and incentivize a replacement without massive dilution of the other founders’ shares. If a founder decides to leave, early in the company’s existence, the vesting restriction protects the other founders from the departing founder, who would have otherwise benefited from the efforts of the founders who remained to build the company. The restriction may be also be adopted in anticipation of future investment, as venture capital and angel investors generally seek some kind of vesting restrictions.
There is often a one year “cliff”, meaning that the founder must be with the company for a year to vest the first increment of his shares. However, vesting provisions often include some exceptions such as termination of a founder without cause and sale of the company.
In most cases, a vesting schedule is usually included in the founders’ agreement rather than having a separate vesting agreement. However, a vesting agreement can be created independent of the founder’s agreement.
- NON-DISCLOSURE AGREEMENT
A non-disclosure agreement is a legally binding contract that establishes a confidential relationship. The party or parties signing the agreement agree that sensitive information they may obtain will not be made available to any others.
NDAs are generally required when two companies enter into discussions about doing business and want to protect their own interests and the details of any potential deal. A company may mandate employees to sign an NDA, if the employee has access to sensitive information about the company. NDAs are also commonly used before discussions between a company seeking funding and potential investors.
If an NDA is breached by one party, the other party may seek court action to prevent any further disclosures and may sue the offending party for monetary damages.
- EMPLOYMENT CONTRACTS
Employment contracts are written legal documents that spell out binding terms between the employee and his or her employer. This document lists the rights, responsibilities, and obligations of both parties.
An employment contract can help employers attract and retain key employees and help protect trade secrets. An employment contract can prohibit employees from revealing company secrets, working for the competition or soliciting customers.
Founders focus on their products or services to the exclusion of the legal implications and requirements of running a successful business. It is important to have the required legal protections in place as soon as possible in order to avoid adverse legal consequences.These legal agreements are necessary and crucial for the seamless operation of any startup.