Founders are often risk-takers with lots of energy and great business ideas. And that is fantastic, as long as you remember to set up the correct legal foundation for your venture. Not having the proper legal basis for your startup might be too big a risk.
Having the correct legal documents in place is essential for the future success of your startup.
You should pay attention to the following startup legal documents when starting a new venture.
To develop your business, you need a team. You partner with co-founders, hire employees, and give them incentives to help you grow the business. The first set of documents we call “team documents“.
A founders agreement details each founder’s commitments, roles, contributions, and any equity, including vesting agreements.
Founders agreements are essential to set out roles, responsibilities, expectations, and equity split. A clear document avoids potential future disputes. A founders’ agreement is also a way to prevent a situation where founders want to unfairly keep all their equity if they want to leave the venture earlier than anticipated. It ensures that the founder is also subject to vesting.
ESOP stands for Employee Share Option Plan. In practice, you set aside a pool of share options that you allocate to employees and directors. You can issue grant agreements to the team members, who can then exercise their options. You can also extend options to advisors and consultants.
ESOPs serve a triple purpose:
– It attracts talent.
– It aligns their goals and yours by incentivising them to contribute to the success of your venture.
– It retains staff by time-based or target-based vesting schedules.
An advisor agreement is a contract between your startup and an advisor setting out the advisor’s role and compensation. It is typically used where compensation is in the form of share options, not cash. Usually, it is applicable when you use high-level strategic advisors, an independent board member, or a member of your advisory board.
An advisor agreement specifies the advisor’s role, e.g., sharing specialist experience or knowledge, providing general business advice and guidance, or making introductions for your startup. If you have several advisors and an advisory board, the agreement should set out if they are expected to attend regular board meetings. In general, the advisor agreement should set out their specific duties.
It is equally important to draw up a consultancy agreement setting out the consultant’s role and compensation (if you use consultants.) Defining the relationship with third-party developers and other service providers is necessary. You should also draw up a consultancy agreement with full-time team members who are not technically employed by the startup or are remote workers.
To avoid potential employment law issues, it is crucial to have a written agreement detailing the relationship as a consultancy and not as employment. You must define the consultant’s responsibilities, role, time commitment and compensation so that both are clear on expectations.
When you employ people in your startup, you must draw up employment contracts that set out all employment-related issues. It must set out the terms of an employee’s job, such as duties, responsibilities, work hours, payment, leave, etc.
If stock options are available to the employee, they should be set out in the employment contract.
Founders Services Agreement
Investors could request a founders services agreement. This is often the case where investors have a seat on the board or have more input in the startup. A founders’ service agreement sets out the services the founders will provide to the startup’s topco. The agreement sets out the working relationship between the founders and the topco.
The above all form part of your “team documents”. The next set of startup legal documents can be called your “raise documents”.
You will probably raise seed funds for your startup through SAFEs and other convertibles.
Having the correct paperwork in place is critical for this phase of your startup. “Raise documents” include SAFE notes, convertible loan notes and board resolution-convertibles.
SAFE stands for Simple Agreement for Future Equity. It is a short and simple agreement between founders and investors in the first round of equity funding. The key terms of a SAFE note are well understood in the startup investments market, making negotiations easier and quicker. A SAFE will set out the basic agreement on which the investor will provide funding in return for shares and percentage ownership in the business at a later stage.
Convertible Loan Notes
Like a SAFE, a convertible loan note is shorter and simpler than the types of documentation used in later, larger investment rounds. A convertible loan note is a convertible instrument that may convert to shares at the next equity funding round. When the loan amount converts to shares, the note holder becomes a shareholder in your startup, getting the same class of shares issued in that equity funding round. As with SAFEs, the key terms of a convertible loan note are well understood in the market. Using a well-drafted document can save time and money during negotiations.
Board Resolution to Sign Convertibles
Investors want to know that you have the authority to enter and sign convertible instruments like SAFEs and convertible loan notes. A resolution passed by the board of directors of your company which approves such actions, will satisfy the investors’ requirements. In a startup, it could be the board of your holding company. The board resolution will authorise one or more company signatories to sign the convertible instruments on behalf of the company. The board can also ratify (approve) past actions taken by such signatories before the resolution was issued. Resolutions give the authority to act on behalf of the company. It ensures that the terms of the signed convertible bind the company.
To protect intellectual property, keep information about your startup confidential and safeguard your startup against team members starting something in competition with your business. To do this, you need what we refer to as “protect documents”.
Protect documents include non-compete agreements, IP assignment agreements and non-disclosures.
A non-compete agreement usually includes non-compete and non-solicit provisions. It prevents a team member from engaging in work that could compete with your startup while they work for you and for a period after they leave. It also stops them from poaching employees from your startup to work with them after they leave. As a founder, you need these documents to protect the commercial interests of your startup. Employees should consider the reasonableness and practical implications of non-competes before agreeing to the terms.
IP Assignment Agreements
Startups often involve “new ideas” or creating new intellectual property. IP includes anything which can be “created with the mind”. It could be registered IP, such as trademarks and patents, or unregistered IP, such as designs, concepts, know-how, websites, copyrights, source code and social media accounts.
As a startup, you want to keep your IP safe and have the legal rights to use the IP. By having an intellectual property assignment agreement, the ownership of any IP is transferred from the creator/owner to the startup. This prevents the assignor (owner/creator) from claiming that the IP created whilst working for your startup belongs to them. It also ensures that the owner of existing IPs, such as trademarks or social media accounts, does what is needed to transfer the IP to your startup.
Founders should generate non-disclosures to protect their startups when sharing sensitive information with potential investors or other third parties. A non-disclosure agreement (NDA) stipulates that all parties will keep the information confidential and only use the information for a specific purpose, for example, deciding whether to invest in the startup. An NDA can be mutual, i.e., both parties are required to keep the information confidential and for a specific use, or one-way if only one party needs to agree to non-disclosure.
Website terms and policies
Lastly, we need to mention a few documents required for running your company while protecting your assets and ideas with some website terms and policies.
Website Acceptable Use Policy
If users can post comments or add content to your website, you should consider publishing an acceptable use policy. A website acceptable use policy sets out the guidelines and restrictions for website users to follow. It is imperative when users can use your site to harass or harm other people or businesses. An acceptable use policy is not legally required, but it can protect your startup and avoid future disputes with users.
Website Cookie Notice
A cookie notice informs users that your website is using cookies (online tracking technology) and asks for the user’s consent to continue using them. In some jurisdictions, publishing a cookie notice is a legal requirement. If using cookies results in using personal data, the GDPR may also apply. Posting a cookie notice ensures that you are legally compliant.
The above may sound like too much paperwork for someone who wants to get on with starting up a business or investing in a great new startup. However, underestimating the importance of startup documents can be very costly! Paying attention to your startup legal documents will protect your startup, your investment, and pave the way for future success.