As an entrepreneur, your role as the steward is never over. If you’re starting your own company, there are so many things to get that done. The sheer volume of legal formalities can drown an ordinary person. But that never deters anybody. The idea of having your own business is so intoxicating that budding entrepreneurs brave the challenges to establish a startup.
But even after you’ve commercialized your product or service, and the business has taken off, you can’t take your hands off the wheel because there are things that you can always do better. Each of these little things goes a long way in ensuring your business stays on the success trajectory. Apart from that, you have to take care of investor pitches, finalizing those deals for your new office, and setting up the infrastructure.
It comes as little surprise then that formal agreements and documents take a backseat. However, not having formal agreements can spell disaster for a startup because it exposes its flank to expensive lawsuits. These lawsuits can emerge in any form – disagreements among the founders, troubles with the vendors, issues with the employees, or trademark and copyright infringement. These are just a few of the things that could stir the brewing pot of trouble.
So, here we’ll explain how to go about setting up your firm with some of the legal startup agreements that you need at each step.
Form a Business
As a business founder, assessing your business needs is important. This is not just from the POV of what it needs currently but what it would need when it evolves. So, early on, you need to decide what sort of business you want to create. Most startups today involve more than one person. That is usually because an idea that went through the stage of “you know what? We’re just kidding ourselves,” all the way through to “You know what? We may actually be on to something here!” is usually not done alone.
Since most startups anyway deal with some aspect of technology, you can be assured that you need at least one tech-savvy person on board. So, at this point, you either need a
- Partnership Agreement including silent partnership
- LLC agreement
- Corporate governance agreement
If you’ve successfully navigated this part through, then we move on to the next one.
Fund Your Business
You’ve successfully crossed the first hurdle – a product that people will actually buy. Okay, but where will the product from? Let us clarify; who will fund the manufacture of those products or skilling for those services? Well, you need investors there. But investors aren’t just going to fund it. There are a lot of conditions there. Most of them are going to request a pre-money valued fully diluted option pool stock.
Even after you’ve secured that loan from them and have given them the management holding, you can’t ensure that they will hold their end of the deal. That is why you need agreements that guarantee you receive all that funding they promised you. This funding would be used for long term capital, working capital, and any other exigency requirements. So, at this point, you need
- Business Loan Agreements
- Debenture Agreements
- Investment agreement and funding Agreement
- Promissory Note Agreement
- Warrant and Security Agreement
- Bond Purchase Agreement
Great! We’ve crossed the second hurdle. The next step for us is
Hire a Team
Once a business grows beyond a certain point, it needs people. You and your business partners can’t handle everything all the time. You need to hire people. But hiring is a tedious and expensive process. Plus, it needs someone who’s experienced enough to judge a person’s culture fit in the company. If you’re not smart enough to handle things, you should be smart enough to realize that and hire the right candidates.
But when you do hire them, you need some agreements in place to enforce their duties, allow exercise of rights, conformity to the firm’s vision, and performance. For that, you need agreements like
- Employment agreement
- Non-disclosure agreements
- Non-compete clauses
- Offer letter
- Severance letters
Among numerous others. But let’s start with these. What’s next?
Intellectual Property
Gone are the days when startups relied on conventional services with professionals. Even the ones that offer traditional services now have some inventions tied to that to enhance the customer experience. With AI and Deep-learning becoming the norm, and most startups being tech-based, intellectual property is on the rise, and people need to generate their own. As a startup, it is hard to purchase someone else’s intellectual property unless it is one of the founders’.
But then again, creating a line of novel business is uncommon. Most businesses are slightly better variations of what already exists. By that logic, most startups have a business that other established players already dabble in. So at the first hint that new disruptive businesses are emerging, they’ll swoop like vultures to use their resources to absorb that disruption.
The only way that startups can prevent that is by patenting their intellectual property, creating trademarks, or getting copyrights. They, by themselves, generate revenue to sustain the business even if the business model to utilize it internally fails. So, some agreements you need are
- Patent License Agreement
- Copyright License Agreement
- Technology assigned risk transfer agreements
- Proprietary information agreements
Among numerous others. But let’s start with these.
Go Commercial
You have everything in place. You purchased your property, you set up your infrastructure, you got your funding, you got your business registered – note that the order of these events is in reverse of what it is supposed to be. That’s because we are counting from the latest hassle. Now the last thing that’s left is to start manufacturing or skilling so that you can sell your products.
At times like this, pricing becomes an issue. Distributor network, royalties, commissions, marketing and advertising, and other fees can become burdensome if not planned properly with vendors. Both horizontal and vertical supply chains(1) can suffer if proper agreements are not drafted. So here are some agreements that you’d need
- Purchase Orders
- Invoices
- Buy-Sell Agreements
Among others. But for now, let’s suffice with these.