5 Key Contracts Essential For Startups
Wanting to explore a lucrative market or perhaps running your own business is one thing and being able to successfully run a Startup venture is completely another. While passion and a catchy idea may be enough to push you in the right direction it is certainly not enough to guarantee success in the entreapreunial ecosystem. Startups by its very nature deal with a great number of unknown factors and its success lies in mitigating these known and unknown pitfalls that might affect its sustainability and growth. Hence it is unwise to adapt an ‘as it comes’ approach when deciding on the timeline, or worst yet the need, of the legal and contractual work required to ensure corporate and commercial security for your business to grow and flourish. There are so many examples of founders being focused on product development ignoring the legal coverage which resulted in their business looking like a failed experiment. Don’t be penny wise foolish by leaving these essential agreements for later.
Regardless of the stage your startup is at, you will, most definitely, be needing a Founders Agreement detailing the rights, responsibilities and duties of all the parties involved since inception. Simply put, a founders agreement defines the working relationship between cofounders, sets out their roles and duties and provides clarity in case of disputes.
Owing to the lack of clear guidance, sometimes it is considered interchangeable with an employment contract. Although this comparison is not entirely untrue since a founders agreement also speaks about the operational and executive involvement of each founder (such as strictures relating to work, payment and casual leaves allowed) however, it also defines other areas of this entrepreneurial partnership that are not covered under a typical employment contract. All in all, this is one agreement which discusses your entire working partnership and therefore, no startup could do without it.
If you are Pakistani startup in the pre seed stage probably you are bootstrapping and chances are you haven’t incorporated yet. This is for two main reasons – firstly, the task of incorporating your startup is still considered a ‘later stage’ concept here than an essential element to kick off your business endeavour and secondly, the current regulatory strictures that applies to registrtion and operations of companies in Pakistan still serves as a constant deterrent for many.
Nevertheless, incorporation remains an unavoidable reality for startups in any part of the world. Resultantly, the Shareholder Agreement becomes a must. If you are a startup then the SHA is your bible – being the most essential agreement of your company, it is referred back to in case of ambiguity or disputes, internal and external both. This is because an SHA details the responsibilities and liabilities of all founders, shareholders and directors of a Company. This agreement primarily entails each shareholders rights and safeguard his/her interests from the other shareholders in the company for example specifying majority shareholders rights, protecting minority shareholder/s and detailing the functioning of the Board of Directors. In addition to this, the SHA also provides a detailed framework for contingencies such as restructuring of the company, winding up or bankruptcy so to safeguard the interest of the shareholders. It also provides a structural procedure to be followed in case of death, insanity or any other impairing circumstances of one of the parties involved. From a commercial point of view, your SHA is the document that defines the company’s Capitalization table or better known as a Cap Table. A Cap table is the structure of the company’s equity makeup which is an essential element (and a decisive factor for future funding) looked into by the investors upon a startup reaching its funding stage.
NON DISCLOSURE AGREEMENT
In the world of today, almost all business need an effective and functional Non Disclosure Agreement (aka the NDA or a Confidentiality Agreement) to be able to operate peacefully and without apprehension. A nondisclosure agreement is fundamentally a promise between the parties executing it to keep confidential all discussions and information that they may become privy to during the course of their professional arrangement. A promise backed by legal and contractual strictures. This could include trade secrets, business plans, market feasibility, product related information and your company’s growth strategy.
Owing to the nature of this contract, it is no surprise that the NDA remains an absolute requirement for most businesses and more so in the ever so competitive startup industry where young startups are routinely pitching and sharing their sensitive and internal information with multiple investors, businesses, advisors, mentors, partners as well as hiring core teams and consultants. Without an effective NDA you are under a constant threat or possibility of, your ideas, plans and sensitive information, being copied, misused or spreading. Imagine where would KFC be if its fried chicken recipe would be available to the general public. Hence, to ensure that the secrecy and protection of your data is maintained companies execute nondisclosure agreements with all parties they believe they’d be sharing sensitive information with so to stipulate what signifies as confidential as well as recourse and remedy in case of unwarranted disclosure.
Your business is worth nothing without its idea or ideology being protected. Be it a product or a service, every kind of business holds intellectual property which needs to be protected from everyone and especially those who were involved in the process of bringing your idea into practical reality.
When you initiate your startup venture, usually there are a few people who are involved in building your product. These are typically the cofounders, core team members and independent consultants or contractors hired to undertake technical tasks such as building your mobile App or your online portal. Now it is but understood that the work that they generate and the contribution they make towards the enhancement of your product/service is for and on behalf of the company – your Startup. However, this basic understanding is not enough to establish your legal rights to that IP. Unless, you execute an agreement to that effect.
Let’s explore some of the obvious scenarios that could result in void of an IP contract.
- Your core team which you had hired to work on your product could very easily claim the product to be entirely theirs or resell it to any third party unless you make sure that you have the absolute rights to its IP.
- Cofounders may have a dispute and decide to split in which event your IP could be up for grabs provided that ownership is not predefined.
- Investors may, most likely, back out from extending funds to a startup which is unclear on its IP ownership.
It is for this reason that startups make sure that they have properly executed IP Assignment Contracts with everyone who has ever worked on their idea establishing that the startup – the company, holds the ownership of all work and contributions made in this process instead of the specific individual or entity assisting you to build it forward. Take it this way, do you think Apple would be able to maintain its market share if its engineers weren’t bound by an IP Assignment agreement?
Remember, in absence of an IP assignment contract the people who have worked on your idea can very easily bring a claim on its ownership, replicate it for another or use it to their benefit and to your ultimate detriment.
CONSULTANCY AGREEMENT OR ADVISORY AGREEMENT
Although interchangeably used consultancy and advisory services are slightly different from one another. The difference more or less lies in the hierarchy of the services being offered. While consultancy contracts could also include independent contractors hired by the company to perform certain operational tasks (much like employees) an advisory arrangement is different in the sense that it brings value addition to the Startup and is considered management level engagement.
When you launch a startup, it is crucial to have the right kind of industry gurus and experts around you to guide and manoeuvre your startup to its full commercial potential. You may have a tight grasp on your idea, product and its functionality but you still may be lacking on the understanding of how your industry works, what are the dos and donts, when is the correct time to take strategic steps or decide on a roadmap from your growth. This is where your advisors, consultants, coaches and experts come in. Needless to mention these experts offer their experiences and acumen at a price and therefore, it is only sensible to put your professional understanding into writing through a consultancy or advisory agreement.
These agreements states the expectation of the startup from the advisor and subject to the expertise, reputation and goodwill attached to the person you’re dealing with, his/her compensation and its verticals are discussed in detail. Some of the advisory and consultancy roles may include business development and networking, corporate and commercial strategist, , financial advisor, legal advisor, growth consultant etc.