Sunday, August 2, 2015

5 Top Agreements Startups Need

Five basic documents that most startup companies need. I believe it’s essential for any business owner to familiarize themselves with the basics of these docs because you’ll be running into them over and over again regardless of what type of business you are in.

1. Shareholders’ Agreement (Operating Agr., Bylaws)

Key Issues to Address: 
- Minimum amount of time contributed by each member?
- Will some members have the authority to act freely within their assigned fields or responsibility, without the need to seek approval of other members?
- What happens if one of the members is not pulling their weight?
- Will the members be required to contribute additional capital to the company after their initial capital contribution? What if somebody fails to do so when required?
- Company’s right of first refusal before a member can sell the interest to third parties?
- Can the company purchase a member’s interest upon their death?
- Penalty for early withdrawal from business (e.g. lower share valuation if leaves the company within the first year or two)?

This document is essentially your business’s Constitution. It describes the role of the members in your business, their relative rights, obligations, percentages of ownership and other essential things.

Chances are, you will need this document even if it’s just you alone in your company. Banks and government agents will require you to file a copy of your Shareholders’ Agr. They won’t usually care what your agreement actually says, as long as you have “something” with your name on it. So, it’s fine to grab a template off the Internet when you are just starting out; you can always replace or edit the doc later.

2. NDA (Confidentiality Agreement)

Key Issues: 
- What if they breach anyway? Consequences of a breach can include: a) fixed-sum amount per breach (“liquidated damages”), b) injunctive relief (court order), c) indemnification (the breaching party reimburses the innocent party for expenses of enforcement including attorney fees).
- Include non-solicitation and non-circumvention provisions to ensure the recipient of your confidential info won’t steal your employees or clients? 

You’ll need an NDA before disclosing your ideas while interviewing contractors, discussing potential partnerships, dealing with investors, etc. Requiring an NDA prior to starting confidential discussions will not only help protect your IP but will also help present you as a professional and savvy business that feels serious about its ideas.

Read also: Elements of a Confidentiality/Non-Disclosure Agreement

3. Independent Contractor Agreement

Key Issues: 
- To ensure that, when you intend to hire a contractor, you don’t accidentally hire an employee due to inadequately drafted contract.  
- Will you own all contractor’s work product or will they be allowed to use it as well?
- Include a non-compete/exclusivity provision? This is not legal in California but the majority of US states allow it.

Special note for California: Designating outsourcer's work product as “work for hire” (WFH) gives you the best IP protection but if you are in California or a similar jurisdiction, it automatically makes the outsourcer an “employee” for the purposes of unemployment insurance, workers' compensation and other tedious, potentially expensive consequences. This is so even if the agreement explicitly states they are independent contractors. See: California Unemployment Insurance Code Sections 621(d) and 686; California Labor Code Section 3351.5(c).

Read also: Beware of Work-for-Hire Language in CA Independent Contractor Agreements

(Free Template) Independent Contractor Agreement (Pro-Company)

4. Share Purchase Agreement (Stock Option Agr., Restricted Stock Purchase Agr.)

You will need this to include a new partner or investor into your company. Some key employees will also want equity participation.

Key Issues: 
- Are shares contingent upon employee achieving certain performance milestones or at least staying employed by the company for an X period of time? 
- Is the purchaser entitled to the shares right away or will they vest incrementally over time?

Read also: Phantom Stock.

5. IP Assignment (or Licensing) Agreement

Key Issue: To be legally valid, an assignment must be supported by an adequate, “arm’s length” consideration.

Perhaps, you want to “recycle” some of your old trademarks for use in the new business. Maybe you want to transfer a patent to your company for tax purposes.  The assignment agreement transfers IP rights from its owner to company. A typical IP assignment agreement will contain the description of the IP transferred to the company, consideration for the IP and whether or not the transfer is permanent.

Note that you have to record an assignment in the U.S. Patent and Trademark Office within three months from its date. If you don't, an assignment, grant, or conveyance will be void as against any subsequent purchaser without notice.

Read also: (Free Template) IP Assignment Agreement