Author - Advocate Vijay Tangri
To set up a strong business entity anew, there’s the mandate of a stronger legal structure of the same. While you are bursting with ideas and the thrill of starting your own independent business, founders, step back and cover the basic elements of the whole process of initiation first – legal documents and their filing.
Filing the right legal document in the right time can serve a startup owner from all the hassles that he might stumble upon later. The documents that have to be filed before incorporation are several. Right from the inception to dealing with the employees, managing members to handling shareholders, if any, there’s a lot to do.
Legal documents play a very important role in the proper running of the business as well as help avoid conflicts and miscommunication in the day-to-day management and functioning of the enterprise. Apart from guarding the interests of the owners of the business, legal documents also ensure accountability and transparency in case of any discrepancy. Amongst all others, following are the most important documents that are supposed to be duly filed by a startup owner to make sure his business sets off effectively-
1. FOUNDER’S AGREEMENT
The founder members of a startup, even if in cordial relations with each other, are subject to inevitable conflicts eventually. The founder’s pledge defines the duties of the founders as administrators and owners of the business. Though the pledge is not as strong as any other legal document, it outlines causes for potential termination of owners, protocol or guidelines to be followed in case of unannounced leave of directors, and many other clauses that aim at the protection of company’s interests.
To start an entity you need to raise funds. The initial funding requires an upgradation on the founder’s pledge by way of including provisions of an employment contract like regular payments, work target for any particular time period, vacation clause, etc. all of which constitute the Founder’s Service Agreement.
2. INTELLECTUAL PROPERTY (IP) ASSIGNMENT AGREEMENT
IP assignment agreement is entered into by the owners of a startup to attract the investments essential for the growth of the business. Standing true mostly in case of technology-related companies, IP assignment is required to be signed in to exhibit the positive evaluation of the startup’s IP portfolio by investors and venture capital firms.
The owner should have complete ownership of all IP assets in writing to avoid expensive claims filed by trolls and companies bent on duplicating the business model, among others.
The IP assignment agreements can be broadly classified into firstly, technology assignment agreement that assigns a startup any intellectual property before the incorporation of the company and secondly, invention assignment agreement that assigns the startup's IP ownership of any relevant work product created by employees after the company is formed.
An IP assignment ensures compliance with all the IP related things belonging to the company after it's incorporated, occasionally avoiding payment of a nominal or agreed amount. This is vital to startups so as to avoid any potential disputes in the future.
3. EMPLOYMENT AGREEMENT
An employment agreement is key to ensure a clear understanding of the employees' part regarding the nature of their jobs and what is expected of them. This legal document contains the obligations and expectations of the company and employees to diffuse disputes arising within the business organizations.
The major reasons behind such an agreement are to provide a degree of protection, define the roles and responsibilities of both the employer and the employees, and present clear books of records for taxation purpose.
The Employment Agreement should include the following –
• Terms of employment regarding the remuneration/compensation, roles and responsibilities, working hours and grounds for termination.
• Reporting structure
• IP ownership of work
• Required commitments and expectations
• Options Vesting
• Policies of the company
4. NON-DISCLOSURE AGREEMENT (NDA)
The availability of an NDA is imperative before the inception of any business relationship with an outside party. With the arrival of any prospective employee or investor, a startup owner should be ready to sign an NDA with the other party. This agreement is signed to protect the company’s classified information and maintain its confidentiality.
An NDA must include clauses like –
• The reason why the information is said to be confidential.
• The way to handle such confidential information effectively.
• The ownership of such information.
• The time when the information will be disclosed.
• The time period for which confidentiality should be maintained.
• Business information that is deemed to be confidential include financial records, business ideas, and innovations, customer database, etc.
The successful signing of an NDA provides first-hand protection of company’s own information and creates a confidential relationship between the business and the contractors, employees, partners, and employers, etc.
5. SHAREHOLDER AGREEMENTS
When a startup is ready to take on private investments, owners should create a shareholder agreement that states the rights of shareholders and when and how they can exercise them. Such rights include the right to transfer share, the right of first refusal, redemption in case of death or disability and the shareholder’s power to run the enterprise.
A share purchase agreement can also be entered into when an investor/partner is inducted into the company. Such an agreement contains details related to purchase and sales terms and the consideration for the exchange of shares.
Other important documents required for the successful inception of a startup include Articles and Memorandum of Association, advisor agreements, licensing agreements, bylaws and Memorandum of Understanding, among others.
Refer our other article related to above - "Common Legal Challenges Faced by Startups "
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