Saturday, April 9, 2016

9 Top Agreements for Tech Startups

Some drafting tips for these basic documents that most tech startup companies will need at some point. 

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

This is basically your company's Constitution. It lays out the basic rights and obligations of the shareholders, outlines ownership percentages, voting, compensation, etc.

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.

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)?

Checklist for Drafting an LLC Operating Agreement, Partnership Agreement, Bylaws

2. NDA (Confidentiality Agreement)

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.

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? 

3&4. Terms of Use and Privacy Policy

This is to protect you from liability for how people use your website.

How to Draft the Terms of Use for an eCommerce Platform
Easy Way to Enforce Terms of Use and Privacy Policy

Easy Guide to Creating Your Privacy Policy

5. Service Contracts 

This is the contract you will be offering your customers when they are hiring you. Some customers (particularly, sophisticated businesses) will offer you their own templates but it's best to prepare docs yourself to ensure that they protect you best (while being fair to the other side, too).

Key Issues:
- Warranty or "no warranty of any kind"
- Limitation of Liability
- Confidentiality
- Indemnification
- Amount of revisions the customer is allowed without having to pay extra
- Liability for materials submitted by customer (or third parties) for inclusion in the work product (Indemnity clause should also cover this)

Drafting a Solid Web Design Contract

6. (Internet) Advertising Agreement


Key Issues:

- Does the advertiser still get paid if online campaign did not generate the desired result?
- Who is responsible for the content of the ads? 
- Advertiser does not endorse in any way the representations in client’s ads.

(Free Template) Internet Advertising Agreement

7. 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.

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).

9. 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.