It is compulsory to not miss out on any of the essential legal documents for startups to avoid involvement in a legal soup. Risks are inevitable in a business, but we can ensure to safeguard ourselves from such risks by following the fundamental guidelines.
To know more about other types of risks and how to mitigate such risks read Risk Management For Startups 101: A Useful Guide.
How to stay away from legal troubles? The most common negligence startup founders make is not defining a strong legal structure.
To stay away from legal troubles, some legal documents are essential. This article deals with the essential legal documents for startups. Read to find out!
What are the essential legal documents for startups?
- Articles of Association or Incorporation
- A non-disclosure agreement(NDA)
- Employee contracts and Offer letters
- Shareholders agreement
- Intellectual Property agreement
- Technological Assignment agreement
- Invention Assignment agreement
- Founder’s agreement
Let’s move on to the detailed versions of these essential legal documents for startups.
A trademark is essential in strengthening your brand. The only disadvantage is that when you register for a trademark in the trademark office, everyone with a similar name is alerted and is allowed to object. So, people who were not going to be interested in your company suddenly become attentive.
Articles of Association or Incorporation
The most common mistake made by startup founders is failing to put up a proper business plan. When you set up only a sole proprietorship it results in huge income tax bills and legal liabilities for which startup founders are personally responsible.
Founders are at risk of losing their savings, and in some extreme cases their homes, if not filed with the Internal Revenue Service to form a distinct legal entity.
If your startup has multiple shareholders, you must form a corporation. To avoid heavier fees during early growth, consider forming a limited liability company (LLC).
The registration of the business entity is the most crucial aspect to make the business valid.
- Name of the business and abbreviations, if any.
- Statement of purpose
- Registered address, corporate address (if any), registered agent
- Number of the shares of stocks authorized to be issued, details of different types of stocks
A non-disclosure agreement (NDA)
The first piece of paper you need when dealing with any client or investor is the non-disclosure agreement. It is one of the essential legal documents for startups. It ensures the privacy of your company and the other party. It’s essential not just for ensuring privacy but is also a workable asset to keep the reign tight on your employees.
Bonus Tip: Use this free non-disclosure agreement generator by legal templates for drafting an NDA within seconds.
It safeguards the founders’ and employees’ ideas and intellectual property rights. People and companies are always looking for ideas and might try to extract the information from the employees involved. Therefore, to protect confidential and sensitive information, an NDA should be signed between the clients or investors.
- Employee contracts and offer letters
- What the confidential information constitutes?
- Handling of information
- Owner of information
- Remedies, in case of a breach of confidentiality
- Time range of information disclosure
- Time range of confidentiality
Employee contracts and offer letters
Employee contracts are the basis of personnel in an organization. Proper contracts for each new addition to your organization are essential for employees to understand the values and expectations of the company.
The commitments and responsibilities, and guidelines on how conflicts are resolved within the company must be clearly expressed. It is advisable to get it worked out by an attorney or a paralegal.
Employee offer letters and expectations of the company must be clearly stated.
- Terms of employment
- Rules and responsibilities
- Working hours
- Grounds of termination
- Commitments required
- Ownership and accountability
- Job leaves
- Employee expectations
- Vesting of shares by the company
Legally approved resignation letters must also be given to the employees when leaving.
When your company is ready to take on private investments, you should create a shareholders agreement. It is one of the essential legal documents for startups, to determine the rights and liabilities of the shareholders and their ability to exercise those rights.
The details of the terms and conditions of investment, sale of shares, and considerations for which such shares will be exchanged are stated in the agreement.
The shareholders are given some number of shares which makes them one of the owners of the company and they can enjoy rights in the crucial decision making. The shareholder’s agreement should be drafted by your lawyer or by a legal expert.
- Proportions of shares for each shareholder
- Different classes of shares (if any)
- Preferred shareholders when a new issue of shares is made.
- Who has the right to stop the issuance of such shares? Who can stop the transfer of shares?
- Rules for transferring shares
- Mechanisms to end the contract, the exit strategy, and policies
- Ways to solve the disputes
Bylaws are the set of rules or principles that govern that space to assure the smooth and correct functioning of the organization. It involves voting rights to select leaders, the election of the board members, or even when taking approvals, and how disputes must be resolved within the organization.
Intellectual Property Agreements
The intellectual property agreement is an essential legal document for startups as it defines whether your startup can captivate the investments it needs to expand.
Many startups often overlook securing these IP rights. You must bank heavily on IP as its portfolio assessment is what sells the company to reasonable investors.
The two types of Intellectual Property rights are:
- Technological Assignment Agreement – It’s signed between the shareholder and the startup. The shareholder allocates their intellectual property to the respective company.
- Invention Assignment Agreement – This agreement is suitable when there is an innovative product or service built by a company’s employee. It guarantees that the company has full rights over the IP portfolio.
To prevent disputes in the future, a company with multiple founders or founding parties must sign the essential legal documents for startups, a comprehensive operative agreement that defines the working conditions of all parties.
It establishes the relationship of the founders, the probability of all works belonging to some other organization in the future, and also outlines a basic communication and conflict-resolution clause.
Each of their roles, ownership, and initial investments must be written in a detailed manner on a stamp paper by a lawyer or a legal expert.
Do you have a website for your startup? If not, a website should be created for your startup and creations. If you do have a website, you must have an agreement between the website owner and the users of the site, and any consumers of goods or services from the site.
- Restrictions on how the site can be used
- Penalty constraints
- Copyright protection warnings
- The jurisdiction where any disagreements must be brought.
These are some of the essential legal documents for startups that will ensure a legally safe business venture. Hope this article has helped you in some way.