One of the principle requirements for any entrepreneur seeking to build and retain a long-term business is the establishment of a strong legal structure. Ignoring important legal aspects during the early growth of a business is the most common mistake startup founders make. New entrepreneurs are often more inclined to focus most of their time building and growing their vision that they forget to cover their legal bases. This can open up a world of unseen risks and threats to harm and disable any business in the short and long term.
Business environments require constant interaction via agreements between either individuals or businesses to move forward in their respective industry. This is why it is essential for startup businesses to acquire and sign certain basic legal contracts at the early stages of their growth whether it is for hiring, partnerships, proposals and disputes to ensure their business is fully protected. Drafting a contract or a legally binding document is always a good idea as it provides a clear and binding record of the terms and parties acceptance of these agreements, while decreasing the potential for future legal disputes.
Legal advice should be sought before entering into any binding contract as business owners often need expert insights into legal terms as well as a comprehensive understanding on how your business maybe susceptible to any future risk.
Confidentiality Agreements: Non-disclosure, Non-compete & Non-solicitation Agreements
In today’s highly competitive and digitized business world, the failure to protect your confidential business information can lead to the loss of business, important clients and can ultimately affect your overall productivity.
Entering into Non-Disclosure Agreements (NDA) with parties who are privilege to sensitive information can protect intellectual property, ideas, business plans, software, trade secrets and other proprietary information. An NDA can come in handy when you pitch a business idea to another party, hire a senior employee or start working closely with a business partner.
Related Article: Why Startups Should Take Legal Formalities Seriously
Non-compete or Non-solicitation Agreements are entered into to protect the training, expertise; knowledge imparted to your employees regarding your business and is often included in hiring documents. These contracts prevent your employees from being involved in other competing businesses or projects for a specified period of time if they decide to leave your company. It also restricts an employee from soliciting the company’s other employees or customers when he leaves in order to protect your client base, resources spent on your employees as well as confidential information they maybe privy to.
Hiring Documents: Employment and Freelance Agreements
It is said that employees are a company’s best assets, however the importance of having well drafted hiring documents are often overlooked. Drafting well-defined contracts between you and your employees can provide a clear understanding of duties, responsibilities, and obligations both parties expect to achieve. Setting definite terms of agreement when you are hiring earlier on will curtail the possibility of a dispute later on in your relationship.
An Employee Agreement governs the terms and conditions of employments, as well as rights and obligations of both parties. Employment contracts have provisions pertaining to salary, bonus, benefits, leave and termination. Freelance Agreements, often used in the IT and creative sectors, would include a clause pertaining to ownership of new intellectual property.
Investment Documents: Founders’ Agreement, Term Sheet & Share Purchase Agreement
At the onset of an exciting startup, co-founders tend to become excessively wrapped up in the day to day running of their business leaving many important legal matters for discussion at a later stage. These matters may end up causing road blocks in the future when questions are raised as to what happens in case of the death or exit of a founder, or what the vision of the company is, or what your short- and long-term plans are. A Founders Agreement promotes clarity amongst the founding team outlining various roles and responsibilities, the equity vested in each entity, and the ownership of intellectual property to minimize risks in case of a dispute.
Once you are ready to get funded, you also need to get your investment-related documents in order, starting with the Term Sheet. This is not a binding document, but it will include the investment amount, mode of payment, mode of security invested in, due diligence and pre-emption rights. This document forms the basis upon which the final agreements are negotiated and signed.
Lastly, upon the procurement of an investment, the final agreement required is the Shareholders Agreement, which will be signed by the investors that are becoming shareholders. This contract will clarify the powers of your shareholders as well as the rights of your company as an issuer of shares.
Collaborative Documents: MoU’s & Joint Venture Agreements
A healthy business is all about collaboration and relationships, so creating an efficient framework early on to negotiate agreements can save your business a lot of time and effort. When your business enters into relationships with other businesses, one of the agreements commonly entered into is a Memorandum of Understanding. It is a document that contains the basic understanding the two parties have reached for any project and captures the intentions of both parties. It is often followed by a more definitive, legally binding contract.
Another important business collaboration agreement is a Joint Venture Agreement, which can allow your business to access newer markets and resources, while ensuring the sharing of risk. You may be required to enter into a joint venture agreement if you are collaborating with a foreign company, which is investing through the 100% FDI route.
Having these simple legal contracts in order can provide businesses and individuals with the required documents that clearly state the expectations of both parties and how prospective negative situations can be overcome. These contracts also are legally enforceable in a court of law and can be used as a tool to safeguard the resources of your business in times when you need it the most.