Introduction
Starting a new business is an exciting and challenging venture. One of the crucial steps in launching a successful start-up is having a thorough understanding of the legal process and contracts necessary to run the company effectively and legally. A start-up founder needs to be familiar with the different types of contracts required to ensure the smooth operation of their business, as well as to protect their interests and those of their partners and investors.
What is a contract?
A contract is an agreement between two or more parties that creates reciprocal obligations that can be enforced by law. For a contract to be valid, it must meet certain essential elements, such as mutual assent, shown by a valid offer and acceptance; adequate consideration; capacity; and legality. In some jurisdictions, an acceptable substitute can satisfy the element of consideration. If a party breaches a contract, the other party may seek remedies such as general damages, consequential damages, reliance damages, or specific performance.
Why do we need start-up founder contracts?
It is essential to have legal contracts in every corporate setting to set up regulations and guidelines guiding the legal regulation of promises. The safeguards provided by solid contracts are essential to running a successful firm, whether used to document a shared understanding of an organisational relationship or regulate future venture demands. Agreements and the rules controlling them have significant legal ramifications that may affect your company’s ability to survive.
Written agreements that have been properly drafted safeguard your company’s interests and uphold each party’s rights throughout any transaction. Legally binding contracts are useful instruments for keeping organisations running efficiently. The Start-up founder contracts offer the crucial legal safeguards you require for any operation. Contracts reduce risk and protect you and the business by clarifying your rights and responsibilities under each engagement.
However, verbal agreements can be difficult to implement since circumstances vary, folks fail to remember what was said, and conflicts over the specifics of the agreement can occur. Having a well-written, valid agreement, it is far more challenging to defend your company’s interests and protect obligations under an agreement.
What Laws Govern Contracts?
The laws governing contracts vary depending on the country, state or province, and even the industry involved. However, most countries have a common law legal system that recognizes the sanctity of contracts and upholds their enforceability. In the United States, for instance, contracts are generally governed by the common law of contracts, a body of law that has evolved through judicial decisions. Additionally, federal and state statutes, such as the Uniform Commercial Code (UCC), may also regulate certain aspects of contracts, such as the sale of goods.
The choice of governing law is crucial for all parties involved in a contract, as differences in laws across various jurisdictions could lead to varying outcomes.
Contracts typically include a choice of law or governing law provision, which allows the parties to agree on the laws of a specific state that will be applied when interpreting the agreement. This provision is especially relevant when the contract involves parties from different states or jurisdictions. The governing law clause specifies that the laws of the jurisdiction mutually agreed upon by the parties will govern the enforcement of the contract.
What are the 7 most essential contracts for start-up founders?
If you are confused about which contracts to prioritise among many contracts, here is the list for you, which includes the essential contracts of a small business or start-up.
- Founders/Co-founders Agreement
- Non-Disclosure Agreement
- Term Sheet
- Employee Stock option Plan (ESOP)
- Service Agreement
- Licensing Agreement
- Supplier Agreement
We will go into more detail about each of the contracts below:
Founders/Co-founders Agreement
This contract is most important if you have a co-founder and business founder. It outlines the rights and responsibilities of each founder, including ownership stakes, management roles, and decision-making processes. It also defines how disputes will be resolved and how the company will be funded. This information becomes important to be documented to avoid future conflicts.
Major clauses of the Co-founders Agreement:
Purpose of the Agreement: This clause defines the purpose of the co-founder
agreement and sets the context for the entire document.
Company Formation: This clause outlines the process of forming the company, including the incorporation process, selection of registered office and initial share capital.
Roles and Responsibilities: This clause outlines the specific roles and responsibilities of each co-founder, including decision-making authority, day-to-day management, and responsibilities related to specific functions such as finance, operations, marketing, etc.
Equity Split: This clause outlines equity distribution among the co-founders and any subsequent equity issuances. It may also include provisions related to vesting, stock options, and stock purchase rights.
Intellectual Property: This clause outlines the ownership and use of any intellectual property generated by the co-founders or the company, including trademarks, patents, and copyrights.
Confidentiality: This clause requires the co-founders to maintain confidentiality about the company’s business and sensitive information.
Termination: This clause outlines the circumstances under which a co-founder may leave the company, including voluntarily or due to a disagreement with the other co-founders, and the process for buying out a departing co-founder’s interest in the company.
Dispute Resolution: This clause outlines the process for resolving disputes between the co-founders, including mediation, arbitration, and other alternative dispute resolution methods.
Governing Law: This clause specifies the governing law used to interpret and enforce the co-founder agreement.
Amendments: This clause outlines the process for making changes to the co-founder agreement.
Entire Agreement: This clause confirms that the co-founder agreement constitutes the agreement between the co-founders and supersedes all prior negotiations, representations, and agreements.
Signatures: This section includes the signature lines for each co-founder, indicating their agreement to the terms and conditions outlined in the co-founder agreement.
Non-disclosure Agreement
A non-disclosure agreement, more popularly known as NDA, also a confidentiality agreement, requires one party to keep confidential information shared by the other party confidential. They are commonly used to protect trade secrets, Ip ownership, business plans, and other sensitive information.
Features of non-disclosure Agreement:
The most important features of non-disclosure agreements are:
- Protects confidential information
- Outlines the obligations of the parties
- Specifies the duration of the agreement
Major clauses of the non-disclosure Agreement:
Definition of Confidential Information: This clause should define confidential information, including all proprietary and trade secret information related to the start-up.
Exclusions from Confidentiality Obligations: This clause should specify any information excluded from the confidentiality obligations, such as information that is already public, independently developed by the recipient, or obtained from a third party without any obligation of confidentiality.
Non-Disclosure Obligation: This clause should specify that the recipient agrees not to disclose confidential information to any third party unless required by law or court order.
Duration of Non-disclosure Obligation: This clause should specify the length of time the recipient is bound by the non-disclosure obligation.
Return or Destruction of Confidential Information: This clause should specify that the recipient must return or destroy all confidential information upon the request of the start-up or at the end of the non-disclosure period.
Remedies: This clause should specify that the recipient acknowledges that the unauthorised disclosure of confidential information could cause irreparable harm to the start-up and that the start-up may seek injunctive relief in addition to any other remedies available at law.
Governing Law: This clause should specify the governing law that will apply to the non-disclosure agreement.
Entire Agreement: This clause should specify that the non-disclosure agreement constitutes the agreement between the parties and supersedes all prior negotiations, understandings, and agreements between the parties.
Assignment: This clause should specify that the recipient may not assign its obligations under the non-disclosure agreement without the prior written consent of the start-up.
Why do you need a non-disclosure agreement?
Every successful start-up founder needs it because
- It protects sensitive information and business secrets
- It helps to maintain the competitive advantage of the start-up
- It provides a framework for managing confidential information.
If you want to know more about NDA, read here https://legamart.com/articles/non-disclosure-agreement-nda/
Term Sheet
A term sheet is a document that outlines the key terms of a proposed investment in a start-up. If you are planning to raise investments from Venture capitalists, a term sheet will be your best friend. It is a non-binding agreement that sets the framework for negotiating a more detailed investment agreement.
Features and importance of an ideal term sheet:
The important features include outlining the key terms of investment, specifying the amount of investment, and setting the framework for negotiating a more detailed agreement.
A term sheet is important because it sets the foundation for the investment and helps ensure that all parties are on the same page before negotiating a more detailed agreement. It also provides a framework for the negotiation of a more detailed agreement.
Clauses:
Here are some common clauses in a term sheet:
Company Information: This clause provides an overview of the company,
including the company’s name, address, incorporation date, and industry.
Investment Overview: This clause details the amount of investment being offered, the form of the investment (e.g. equity or debt), and the valuation of the company.
Capitalisation: This clause outlines the company’s current and post-investment capital structure, including the number of authorised and issued shares, outstanding convertible instruments, and other equity.
Stock Option Pool: This clause details the company’s stock option pool, including the size of the pool, the strike price, and the vesting schedule.
Preferred Stock: This clause outlines the rights and preferences of the preferred stock, including dividends, liquidation preferences, and voting rights.
Board of Directors: This clause details the composition and responsibilities of the board of directors, including the size of the board, the composition of the board, and the appointment process.
Management: This clause details the responsibilities and compensation of the company’s management team, including the roles and responsibilities of the CEO, CFO, and other key executives.
Use of Proceeds: This clause outlines how the investment proceeds will be used, including specific expenditures and the intended return on investment.
Closing Conditions: This clause details the conditions that must be met before the investment can close, including regulatory approvals, due diligence, and the execution of definitive agreements.
Covenants: This clause outlines the obligations of the company and the investors, including restrictive covenants, representation and warranties, and indemnification.
Employee Stock option Plan (ESOP)
An ESOP is a plan that allows the founding team and employees to acquire ownership in the company through the grant of stock options. Also, it protects employee’s rights when it gets start-up funding from an investor. These are usually a part of the employment agreement mentioned in their offer letter and are governed by the employment law of the respective countries.
Features and Importance:
The common features of an ESOP are – providing employees with the opportunity to acquire ownership in the company, outlining the terms of the option grant, and specifying the conditions for exercising the options. And an ESOP is really important for start-ups because it provides a way to attract and retain top talent by offering equity in the company. Also, it provides a sense of ownership, which motivates them to work harder.
Clauses:
Here is a list of clauses that may be included in an Employee Stock Option Plan (ESOP) agreement for a start-up:
Definition of Terms: This clause defines the key terms used in the agreement, such as “Option,” “Exercise Price,” “Vesting Period,” etc.
Purpose: This clause explains the purpose of the ESOP, such as to provide incentives for employees to remain with the company and contribute to its growth and success.
Eligibility: This clause outlines the criteria for participating in the ESOP, such as full-time employment, length of service, job title, etc.
Grant of Options: This clause sets out the number of options granted to each eligible employee and the terms and conditions associated with those options, such as the exercise price, vesting period, and expiration date.
Exercise of Options: This clause outlines the process and conditions under which employees may exercise their options, such as obtaining approval from the company’s board of directors and meeting the vesting requirements.
Transferability: This clause explains whether the options may be transferred or assigned to third parties and the conditions under which such transfers or assignments may occur.
Termination of Employment: This clause sets out the circumstances under which an employee’s options will be cancelled or forfeited upon termination of
employment, such as resignation, termination for cause, or death.
Adjustments: This clause provides for adjustments to the terms of the options in the event of certain corporate events, such as stock splits, dividends, mergers, or acquisitions.
Compliance with Law: This clause requires the company and its employees to comply with all applicable laws and regulations in connection with the ESOP.
Amendment: This clause provides for the amendment of the ESOP agreement by
the company’s board of directors.
Governing Law: This clause specifies the law that will govern the interpretation and enforcement of the ESOP agreement.
Notices: This clause sets out how notices may be given under the agreement, such as in writing or by email.
These are examples of common clauses that may be included in an ESOP agreement. The specific terms and conditions of an ESOP will depend on the company’s needs and goals, as well as applicable laws and regulations.
Service Agreement
A Service Agreement is a contract between a company and an independent contractor or service provider. It outlines the terms of the services to be provided, Reduces misunderstandings, sets expectations, and protects Intellectual Property by clarifying ownership and confidentiality obligations. It also facilitates payment and ensures prompt payment as agreed.
Features
- Clarity: A service agreement clarifies the terms and conditions of the services to be provided, reducing the risk of misunderstandings and disputes.
- Protection: A well-drafted service agreement can protect a start-up’s interests by defining the responsibilities of each party and setting clear expectations.
- Flexibility: Service agreements can be tailored to meet the specific needs of a start-up, allowing for flexibility in the provision of services.
- Evidence: A service agreement serves as written evidence of the terms and conditions agreed upon by both parties, providing a reference point in the event of a dispute.
- Credibility: Having a professional and well-drafted service agreement can enhance a start-up’s credibility and reputation.
- Increases Trust: Sets clear terms and builds strong business relationships. Supports Legal Enforcement: Provides the legal basis for dispute resolution.
- Enhances Professionalism: Demonstrates commitment to high-quality services. Provides Legal Protection: Protects from liability in case of damages or losses.
Sample Clauses for a Service Agreement:
Scope of Work: The Service Provider agrees to provide the following services to the Client: [insert description of services].
Duration: This agreement shall commence on [insert start date] and shall continue until [insert end date] unless otherwise terminated per the provisions of this agreement.
Payment Terms: The Client shall pay the Service Provider [insert amount] for the services provided under this agreement. Payment shall be made [insert payment schedule].
Confidentiality: The Service Provider shall keep confidential all confidential information disclosed by the Client and shall not use such information for any purpose other than as required to perform the services under this agreement.
Termination: Either party may terminate this agreement upon written notice to another party if the other party breaches any material term or condition of this agreement.
Liability: The Service Provider shall be liable for any damages resulting from its breach of this agreement but shall not be liable for any indirect, incidental, or consequential damages.
Dispute Resolution: In the event of a dispute arising under this agreement, the parties shall attempt to resolve the dispute through mediation before resorting to arbitration or litigation.
Intellectual Property Rights: The Service Provider agrees that all intellectual property rights in any materials created or delivered under this agreement shall belong to the Client.
Amendments: This agreement may be amended only by a written agreement signed by both parties.
Governing Law: This agreement shall be governed by and construed per the laws of [insert jurisdiction].
Licensing Agreement
A licensing agreement is important for a start-up because it allows the start-up to monetise its technology, products, or services by granting a licence to another party to use them in exchange for a fee. This can provide the start-up with a steady source of revenue, which can be used to fund further growth and development.
Key Clauses
Scope of Licence: Defines the extent and conditions of the licence.
Duration of Agreement: Specifies the length of the licence and renewal options.
Payment and Royalty Terms: Outlines the financial terms, payment schedule, and royalties.
Restrictions on Use: Limits the use of licensed technology.
Conditions for Termination: Outlines when the agreement can be terminated by
either of the parties.
Obligations of the Licensee: Specifies the responsibilities of the licensee in using the technology.
Supplier Agreement
A supplier agreement is important for a start-up because it establishes the terms and conditions of the relationship between the start-up and its suppliers. This agreement helps to ensure that the start-up can receive consistent and high-quality supplies, which are critical to its operations and growth. It provides a framework for a smooth transaction, ensuring timely delivery, payment, and quality control standards. It protects the reputation of the start-up by ensuring that the products or services provided meet the necessary standards.
Also, a supplier agreement enables the start-up to make informed decisions about future business relationships with the supplier while facilitating the resolution of disputes in a timely and effective manner, reducing the risk of prolonged litigation to a great extent.
Most important clauses of a supplier agreement:
Scope of Agreement: Defines what products/services the supplier will provide, delivery location/time frame, and specific requirements.
Terms of Delivery/Payment: Outlines delivery schedule, payment terms, due date, late payment fees, and order return/cancellation conditions. It helps ensure smooth transactions between suppliers and start-ups.
Quality Control Standards: Sets standards for quality, safety, and reliability and specifies inspection/testing procedures. Protects the start-up’s reputation.
Conditions for Termination: Outlines conditions under which the agreement can be terminated.
Obligations of Supplier: Specifies supplier responsibilities such as timely delivery, adherence to quality standards, and notification of changes. Ensures supplier fulfils obligations and maintains standards.
Having a well-drafted supplier agreement is crucial for the success of a start-up, as it helps to establish clear expectations, minimise risks, and ensure a smooth transaction with suppliers.
Why do you need these Contracts for start-up founders?
Legal Protection: A licence agreement ensures legal clarity and helps avoid disputes.
Revenue Generation: Licensing technology generates income for a start-up.
New Markets: Licensing opens up access to new markets and customers.
Brand Awareness: Licensing can increase brand recognition.
Competitive Advantage: Licensing technology provides a start-up with a competitive edge through access to new technologies, resources, and expertise.
Factors to consider before signing any contract as a start-up founder
Before signing a contract, you should review all the terms and conditions carefully to ensure you understand them. You should also ensure that the contract accurately reflects what you have agreed to and that you are comfortable with the obligations it places on you. It is also worth noting that even minor changes to the provisions and clauses of a contract can lead to unfavourable outcomes. Here are some factors to be critically considered before executing any contract;
Understand the law
It is crucial to ensure that the contract aligns with the applicable laws and regulations and does not infringe on the rights of any party or beneficiary, particularly if you are the party responsible for drafting it.
Details of the Trading Company
It is essential to ensure that the information regarding the trading companies provided in the contract document is precise. It is recommended to validate the accuracy of the details provided by all the parties involved in the contract. Verifying basic details such as the registered address and nature of their business through a background check can furnish the necessary information and prevent the organization from falling prey to fraud.
Seek professional advice
If you suspect that the contract contains obscure provisions or terminologies that only a specialized professional can comprehend, it is prudent to seek guidance from experts such as lawyers, arbitrators, or mediators. Lawyers possess expertise in legal documentation and can elucidate all the terms and conditions of the contract to you. They can also assist you in detecting any concealed clauses that might be detrimental to your interests.
Know your rights and duties
A contract entails mutual obligations for both parties involved. It is, therefore, crucial to comprehend both the rights and duties outlined in the agreement, especially with regard to your responsibilities.
Terms for Settling a Conflict
In the event of disputes between contract partners, legal intervention may often be necessary to reach an amicable settlement.
Consider the penalty for non-Compliance
Non-compliance with the terms of a contract is a prevalent issue, where organizations may deliberately or unintentionally fail to adhere to the stipulated terms due to internal or external factors. Therefore, it is crucial for the parties involved in a contract to establish the penalties and the number of warnings to be issued before invoking the penalty.
Conclusion
To conclude, a start-up company and the business owner must be knowledgeable about the essential contracts needed for their business. By having a solid understanding of the contracts involved, they can make informed decisions and avoid potential legal issues that could harm their business. Understanding contracts is a critical component of being a successful entrepreneur, and it is essential to take the time to learn about these agreements before launching a new business.
When considering entering into any business agreement, it is essential to seek the counsel of an established business litigation attorney. This will allow us to work with you to create an enforceable contract that safeguards your company. Contracts frequently include perplexing legal jargon that business owners are unfamiliar with. Accurate knowledge of the advantages of contractual terms and whether a firm should accept particular contractual provisions may be found in the advice of professional attorneys.
You can reach out to us for a free consultation call so we can advise you to ensure that your company is properly protected by agreements that will promote its success and shield it from any unfavourable circumstances. Book your session now!
Frequently Asked Questions
What Is a Start-up Founder and Cofounder?
A start-up founder is an individual who undertakes the entrepreneurial venture of establishing a new company to make it a profitable enterprise. This involves assuming various risks and responsibilities associated with building a business, including financial, legal, and personnel risks. On the other hand, a start-up cofounder is a partner who collaborates in launching and expanding a new business. Cofounders often share a common entrepreneurial vision and work together from the initial stages to transform the company into a thriving enterprise.
Can I amend a contract after signing it?
Yes. A contract can be amended after it has been signed if both parties agree to the changes. The changes should be documented in writing and signed by both parties.
