The Most Essential Contracts a Startup Company Should Have: The Pillar’s guide to Startups
Updated: Jun 5, 2020
Mazen El Omdah - Partner - email@example.com
Vienna Willms - Trainee-Associate - V.firstname.lastname@example.org
What is the most common mistake startup founders make during early growth? Not establishing a strong legal structure off the bat. While it’s tempting to dig into the vision for your company and start making your idea a reality, it’s important that founders pause and cover their legal bases.
Below, we’ve outlined the core legal documents that founders need to put into place to avoid costly legal battles down the road.
1) Founder’s Agreement
To avoid any conflicts, co-founders should sign a founder’s agreement. It defines the relationship of the founders, provides the expectation that all work will in the future belong to some entity and outline communication and conflict-resolution clause to prevent disputes.
- Shareholder Agreements
A shareholder agreement determines the rights of shareholders and defines when they can exercise those rights. They can include shareholders’ right to transfer shares, right of first refusal, and redemption upon death or disability and shareholders’ power to manage and run the startup.
Make sure it doesn’t conflict with the original founders agreement.
- Investment Agreement and Term Sheet
Investment agreements are agreements between a company and an investor in which the investor gets a certain share of ownership in the company in exchange for money. Investment Term sheets state the terms under which an investor would invest in the startup.
Bylaws should establish the internal rules of the company like how to settle disputes, select leadership and determine the rights and powers of shareholders. They should institute voting thresholds for approvals to certain actions by the corporation (electing new board members, entering into debt etc.) Important contents are:
Confirming that the startup can take stockholder action by written consent without a meeting
Confirming that the startup can take board action by written consent without a meeting
Roles of officers
Number of directors
Notice by Electronic Transmission
3) Employee Contracts and Offer Letters
These legal documents are necessary to ensure future employees understand what’s expected of them. They should clearly state the following:
Terms of employment (e.g., compensation, role responsibilities, working hours and grounds for termination)
IP ownership of work (see below)
Company policies (e.g., vacation days, paid time off structure, dress code)
- Intellectual Property Assignment Agreement (as part of the contract of employment)
Protected intellectual property is crucial for startups. During the formation of a new company, a best practice is to assign all relevant intellectual property to the company. Invention Assignment Agreements for example assign the new company IP ownership of any relevant work product created by employees after the company’s formation. A confidentiality and invention assignment agreement is typically signed by founders and employees.
4) NDAs/Confidentiality Agreement
A Non-Disclosure Agreement provides that the recipient of proprietary information holds the information in strict confidence and will only use the information for the purposes of evaluating whether or not to enter into a business relationship with you. Hence it has to be signed beforehand. NDAs should contain the following:
What constitutes confidential information
How confidential information should be handled
Who owns that information (the company)
The time period that the information will be disclosed
The time period confidentiality will be maintained
5) Services Agreements and Statements of Work
They are used for getting vendors to provide you with services (e.g. app development, office cleaning, marketing) or to provide services to others. Statements of Work detail the nature of the services, and deliverables are usually part of a services agreement. Check beforehand if you need these or if you’ll do everything on your own without help of third parties.
6) Distribution, Re-seller and Supplier Agreements
Distribution agreements are usually between a manufacturer/ vendor and distributor. Some key terms are the duration of the agreement, whether it’s exclusive, and the territory covered. Check beforehand if you need these or if you’ll do everything on your own.
Re-seller Agreements are agreements with companies that buy products and generally add value before reselling it. Check beforehand if you need these or if you’ll do everything on your own.
The supply agreement is a contract that commits a buyer and a supplier to do business with each other for a set period of time, buying and selling set quantities of goods at specified prices. In order to avoid problems, they have to include specific definitions of:
Price and Payment (How easy it is to terminate the contract?)
Quantity (Does the agreement commit the supplier to more than they can deliver/ the buyer to pay for more than they need?
Duration (Is there a unilateral right to renew the contract without negotiation?)
Warranties, disclaimers and guarantees (Does the warranty suit a specific contract? Does the contract commit the buyer to purchase from the supplier?)
7) End User License Agreements
Mostly they are non-negotiated shrink-wrap or browse-wrap agreements and govern how users can use the software. They put limits to the licencor's liability and prohibit things like reverse engineering.
a. Software Licenses
Big deals, big clients, and custom software are more likely to be a negotiated agreement so having only EULA might not be sufficient. Nevertheless when you are in the very beginning you can wait with this until needed, but make sure to talk to your trusted lawyer beforehand.
b. General Terms and Conditions
Well-drafted terms should act like a manual or recipe book for doing business and having absolute clarity on what should happen in a given situation. The exact elements to include depend on the individual business but you should consider including:
A clear definition of what products or services will be provided
Setting out the payment terms/ When is payment due
Any guarantees or warranties offered
Timelines for delivery and any queries
Specifying what happens if either party doesn’t deliver or pay or wants to end the relationship
The term of the agreement and what notice is required to get out of it
Which law shall govern the contract
Who is the site/app owner?
What data is being collected? How is that data being collected?
For which purposes is the data collected? Analytics? Email Marketing?
What third parties will have access to the information? Will any third party collect data through widgets (e.g. social buttons) and integrations?
What rights do users have? Can they request to see the data you have on them, can they request to rectify, erase or block their data (e.g. under European regulations most of this is mandatory)?
8) Memorandum of Understanding
A memorandum of understanding is a document that describes the broad outlines of an agreement that two or more parties have reached. MOUs communicate the mutually accepted expectations of all of the parties involved in a negotiation. While not legally binding, the MOU signals that a binding contract is imminent.
Clear legal agreements help minimize the chances of dispute, which can quickly exhaust the company’s monetary resources and distract it from what really matters – building a business. These agreements also help attract investors, who are more likely to invest in a company if they see that the company has taken the right steps to protect its intellectual property.