September 6, 2016
If you are launching a startup, the most important thing that you can do is to ensure that your bases are covered when it comes to having all of the necessary legal documents in place. This means bringing on qualified legal counsel as early in the process as possible.
While it's never a good idea to try and navigate any legal situation without an attorney, it is good to be knowledgeable about the various legal documents that you might need as you launch your startup, establish relationships with cofounders, and deal with vendors, employees, and shareholders. If you have not asked your attorney about the following documents, you should do so right away.
IP Assignment Agreement
Your IP assignment agreement is likely to be the first document that potential investors want to see. This is especially true if you are a technical startup. In many cases, your IP portfolio is more heavily when it comes to evaluating your value than your inventory or future orders. The reason that this is so important to investors is that documented IP ownership can serve as a barrier to entry for anyone wanting to copy your business model. It also stops rogue team members from absconding with intellectual property.
This is an agreement that is written up and signed by all founding members of a startup. This defines each person’s roles, methods for solving conflicts, and the relationships and hierarchy of the founders. It should also contain language contributions by the founders are the property of the startup, or of any entity that should take ownership of the startup in the future.
Employment Contracts and Offers
It’s a bad idea to bring on new employees without having clear contracts and offers of employment. These should outline all terms of the offer and employment. This includes:
- Length of employment
- Initial rate of pay
- All duties to be performed
- Percentage of travel time
- Company policies
- Retirement and vesting information
- Who owns the work they produce including anything that could be subject to a patent or copyright
Articles of Incorporation
Don’t put off incorporating your startup. Failure to do so can result in tax penalties and personal liabilities for yourself and your co-founders. It is very important to incorporate so that your startup is a wholly separate entity. If you have a relatively small startup and you do not have shareholders, it may be okay to form a simple LLC. However, if there are shareholders involved, it may be best to look into forming a C corporation.
Graeme Donnelly, CEO of Rapid Formations, the company formation agents, mentions the following: “The effects of not properly incorporating can be devastating. People have lost their homes, reputations, and livelihoods because of this. What a shame when incorporating can be so easy.”
Bylaws are essentially the internal rules of the company. They help determine how disputes are settled. They also set the rights and responsibilities of shareholders. A good bylaws document will even outline how leadership is elected, and which actions can be performed by people at each leadership tier with or without approval. For example, one bylaw might outline the amount of money that a team or department leader can spend during a quarter before they must get approval from the board of directors.
There are times when it is necessary to disclose sensitive information to outside parties. This might include customer data, company secrets, future plans, and financial information. Vendors, contractors, consultants, external auditors, even lawyers may require access to this information to do their jobs. This is acceptable, but a non-disclosure agreement is an absolute must have in any of these situations. This agreement defines confidential information, outlines the proper ways to handle that information, clearly states that the startup is the owner of that information, and determines and relevant time periods.
If you have reached the point where you are getting funding from private investors, it is time to have your attorneys draw up shareholder agreements. These documents outline the shareholders' rights and the means by which they can exercise these rights. This includes how shares may be sold or transferred, what happens when a shareholder dies, right of first refusal, and more. Because there are regulatory requirements related to the sale and exchange of shares, these agreements are absolutely crucial.
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