Startup Legal Guide: 5 Agreements An Entrepreneur Must Know About

Legal agreements
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Being a startup entrepreneur we have to indulge into many things simultaneously. At one moment we are looking into product development, at other 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 the startup. Utmost care should be taken while dealing with such issues.

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

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 other things also 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).

Employment Agreement:

This is the agreement between your company and every employee that will be inducted into your company, including its founders. This is also important to develop a healthy work environment for your company. This agreement generally establishes the rights and obligations of employees. Some of the key aspects to keep in mind would be that 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. can also be included.

These agreements are the most basic ones that every Entrepreneur should know, althought there are many others that an entrepreneur need to be aware of. For example, some of them are Share Purchase Agreement (SPA), Intellectual Property Assignment Agreement, Licensing Agreement etc. Moreover, if you are planning to raise funds for your startup, investors would aks 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 for the security of your idea’s and transparency among your co-founders. Hence you would concentrate more on actual business and related issues.

Vipul Meehnia is a software professional, entrepreneur and visionary with 6 years of experience in delivering innovative world-class products in various markets globally. Besides being an ideating machine and researcher, he likes to share his views on various topics at vipulmeehnia.com.

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