Essential Agreements Every Startup Should Have
Startups are known for their innovative ideas, disruptive technologies, and entrepreneurial spirit. While these qualities are crucial for success, it's equally important for startups to legally protect their interests, mitigate risks, and establish a strong foundation for growth. In this blog, we briefly discuss the key legal agreements that startups should have in place to safeguard their operations and ensure long-term success.
A Founders' Agreement serves as a contractual framework governing the relationships among a company's founders. It outlines the rights, responsibilities, liabilities, and obligations of each founder, addressing matters that may not be covered by the company's shareholders' agreement. The primary purpose of a Founders' Agreement is to protect the interests of each founder and establish a clear understanding of the business's fundamental structure and how the founders will collaborate to propel the company forward. Forging an agreement between all founders helps mitigate the risk of a lawsuit over who owns the business.
Some provisions that could be included in a Founders’ Agreement are, transfer of ownership, ownership structure, confidentiality, decision-making and dispute resolution, representations and warranties and choice of law.
A lawsuit can create significant challenges for the founders, particularly when the business achieves substantial success. An illustrative case is the lawsuit brought against Facebook founder Mark Zuckerberg by the Winklevoss brothers, who claimed that he had used their idea to launch Facebook. Ultimately, Zuckerberg settled the lawsuit by agreeing to pay the Winklevoss brothers more than $200 million in Facebook stock. Had the parties negotiated their differences at the inception of the company, Zuckerberg could have potentially offered the Winklevoss brothers a lesser sum of money or a small equity stake in the company to resolve their dispute.
Key questions we will explore with you when drafting a Founders' Agreement are strategy, goals, timelines, ownership structure, and management (i.e. Can we each launch other startups while working on this project? Under what circumstances can a founder be removed as an employee of the business? What happens if one founder is not living up to expectations under the Agreement?)
Non-Disclosure Agreement (NDA)
NDAs are legally enforceable agreements between parties that are used to ensure that certain information will remain confidential. Startups often deal with proprietary information, trade secrets, and confidential data that are crucial to the company's success. An NDA is a vital tool to protect such information, in particular while the patent application has not yet been filed, when sharing it with employees, contractors, partners, or investors. It ensures that the recipient agrees to keep the information confidential and prevents unauthorized use or disclosure that could financially damage the new company.
Benefits of NDAs include:
establishing expectations with employees and providing guidance of how sensitive information will be handled;
protecting trade secrets when the information is shared during the regular course of business with third parties;
clearly defining the information which is to remain confidential; and
providing the employer with an additional legal recourse under breach of contract, aside from any tort claims available in law.
Intellectual Property (IP) Assignment Agreement
The IP Assignment is needed when a company applies for Letters Patent. Startups usually rely on their intellectual property, such as patents, trademarks, copyrights, and trade secrets. An IP assignment agreement ensures that intangible property, such as a copyright, a trademark, or company trade secrets created by employees, contractors, or consultants during their work for the company is legally transferred to the company. This protects the company's rights and prevents future disputes. An intellectual property assignment agreement also provides assurance to investors that the founders have legally transferred to the company the intellectual property required to run the business.
In addition to the above agreements, new companies will also require to have in place well-drafted agreements, such as:
Share Subscription Agreement
Investment Agreements, i.e. with angel investors, VCs, or crowdfunding platforms
Independent Contractor Agreements
Vendor/ Supplier Agreements
Startups face unique legal challenges and must prioritize establishing a strong legal foundation to protect their interests, foster growth, and mitigate risks. Consulting with a competent business lawyer can provide valuable guidance in tailoring these agreements to the specific needs and goals of the startup. Investing in legal protection from the beginning can save a startup from costly disputes in the future and help ensure long-term success.
If you are launching a new company, our professional expertise in corporate law, and particularly, in working with startups can support and protect every step of the way the company you are working hard to build and the innovation you are bringing into the world.
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