Starting a business can be an exciting time, but new entrepreneurs can often panic when they come across the legal or financial jargon associated with running a big idea.
Whether you are doing this as part of a startup accelerator program, bootstrapping, or have just read Steve Jobs’s bio, it’s time to take stock of your legal position and get on the startup register. This article will discuss the 10 essential startup legal documents every founder should know about.
10 Essential Startup Legal Documents Every Founder Should Know About
You’re finally ready to take the leap and become an entrepreneur. You’ve followed your passion and are now prepared to make it happen. Before you start, there are a few documents every startup founder should have. They include
- Founders/Shareholders Agreement
- Articles of Incorporation or Charter
- Articles of Organization
- Subscription Agreement
- Stock purchase agreement
- Company Statutory Report
- Employee contracts documents
- Non-disclosure Agreements
- Intellectual Property (IP) agreement
- Business Insurance Policy
A legal firm like vazi Legal can help you expedite actions to fast-track your understanding and acquisition of these documents. Still, this article has been broken down to give you first-hand insight into what these documents are and their importance.
Without further ado, let’s get down to the explanation of what each legal document stands for.
Founders/Shareholders Agreement
When you start a new business, it is essential to get the right start. One of the first things you should do is create a shareholder agreement. A shareholders agreement is an agreement between company owners regarding how they will work together and what each owner’s share of the business is worth.
This agreement is quintessential to a startup as it defines the responsibility of each founder and shareholder to prevent friction in dispensing their duties.
Some of the clauses that are added to a typical founders agreement include:
- The structure of the startup’s management
- Restrictions on share acquisition and transfers
- Non-competition of directors specifies that no founder (past or present) should be in direct contact with a startup competitor.
- You may issue additional shares and whether existing shareholders have the right to purchase them at the same price to avoid dilution.
- Existing shares may or may not be transferred.
- How a shareholder can exit (e.g., shotgun clause in the event of a dispute)
The founders’ agreement is not exhaustive as they could be modified to suit your needs. More importantly, it is advisable to seek legal counsel while preparing one.
Articles of Incorporation or Charter
This is another essential startup legal document every founder should know. It is one of the documents that make an organization legal to operate in whatever city or region.
For your corporation to be recognized as a legal entity, fit to operate anywhere in the country, you must file for Articles of Incorporation, sometimes called Charter.
To get your corporation startup up and running, you must file for Articles of Incorporation. You will be asked to submit details such as the name of your company, a description of the company’s business, a physical address for your company, a resident agent in the state where you are filing from, and the name and signature of the person submitting the registration.
Articles of Organization
The Articles of Organization document, like the Articles of Incorporation document, is a statement filed with the state when a company is formed. The difference is that while the Articles of Incorporation are filed when the company is a corporation, the Articles of Organization are filed when it is an LLC.
The documents and information provided in filing for the Articles of Incorporation document are the same for Articles of Organization. Before filing for any of these documents, you must decide whether your business will be a corporation or LLC.
Subscription Agreement
In Nigeria, the Securities and Exchange Commission (SEC) is the federal government body that regulates the sales of corporate and limited-liability company shares. In many cases, you will find that transfers in privately held companies will be exempt from regulatory requirements.
However, it attracts regulatory trouble when share transfers are made to passive investors who would not actively contribute to the startup’s growth.
To overcome this hurdle and get outside equity investment without attracting undue attention, startups should have a subscription agreement.
Stock Purchase Agreement
A stock purchase agreement is a legal document that sets forth the terms of the stock acquisition. It typically includes details such as the price and number of shares being purchased, the date the sale takes place, and the payment schedule.
The primary purpose of a stock purchase agreement is to protect both parties from potential problems down the road. This agreement should include clauses that specify what happens if there are unforeseen issues with acquiring funds or closing on time.
The stock purchase agreement should also stipulate who will hold title to the shares until they are paid in full. If one party defaults on his obligation to pay his share, this provision can help protect him from losing ownership rights over any claims he has already paid for but not yet received.
A Membership Interest Purchase Agreement is the document you should provide if your startup is an LLC. For corporations, get a Stock Purchase Agreement; for LLCs, get a Membership Interest Purchase Agreement.
Company Statutory Report/Document
The company’s statutory report is an essential document for founders. It is a mandatory financial report of the company or startup. Every founder is expected to hold a statutory meeting within not less than one month and not more than six months after their startup commences business.
Like many other legal documents, statutory reports are often neglected, but they remain an essential document for founders to know. According to a paper published by Yumpu.com on why statutory reporting is necessary, the following are some of the benefits of preparing a statutory report for your startup:
- It helps with debt management.
- Real-time tracking trends and best practices to make accurate and informed business decisions.
- Managing liabilities
- Improvement in the company’s financial efficiency
- Compliance with business laws and regulations
Employee Contracts Agreement
You are going to deal with employees in your startup. As a startup founder, it is your job to set the tone for the company. This means that if you want a culture of transparency and honesty, you need to lead by example and be transparent and honest with your employees.
One way to do this is by creating a contract agreement document that outlines what is expected of both parties during employment.
An employee contract agreement document is not just for founders hiring for full-time positions. It can be used for part-time or freelance work as well. It is a legally binding contract between an employee and employer which defines compensation, duration of employment, benefits, expectations regarding performance reviews (both from the employee and employer), and other conditions of the employment relationship.
Another version of the employee agreement contract is the Independent Contractor Agreement (ICA) which is designed for startups employing independent contractors.
Non-Disclosure Agreements
A non-disclosure agreement (NDA) is a legally binding contract between two or more parties (usually between founders and employees or founders and founders) regarding the use and disclosure of confidential information.
In an NDA document, one party agrees to share sensitive information about its business with the second party, and the second party consents to keep this information confidential.
Your startup should have three types of non-disclosure agreements depending on what you intend to achieve. They include:
Unilateral non-disclosure agreement
A unilateral non-disclosure agreement is an agreement between two parties in which one party discloses confidential information without requiring the receiving party to do the same.
Bilateral non-disclosure agreement
In a bilateral non-disclosure agreement, the parties involved agree to hold the confidential information in the strictest confidence and not share it with any third party. The parties involved are usually just two.
Multilateral non-disclosure agreement
In a multilateral non-disclosure agreement, three or more parties decide how confidential you should treat information. Here, at least one party discloses business information, and the other parties promise to protect it.
It is essential to have an NDA in place when:
- You share confidential financial, marketing, investment, and other critical details with employees and prospective clients.
- Demonstrating the functionality of a new product to prospective buyers
- Presenting a new business idea or concept to a business partner or investor
- Onboarding new employees or interns and giving them access to confidential information
- Providing confidential information to a service provider
When preparing your non-disclosure agreement document, you would need to specify the parties involved, the personal information, the scope of the confidentiality of the information disclosed to the receiving party, exclusions, and the terms of the agreement.
Intellectual Property (IP) Agreement
An intellectual property agreement is a formal contract between employees (full-time and part-time employees and freelancers) and employers that protects an organization’s intellectual property when employees and freelancers create inventions as part of their job. This is important, especially when dealing with products, innovations, and stories.
Business Insurance Policy
Business insurance is a necessity for every business owner. This insurance protects your business from financial loss due to unexpected events such as fire, flood, or theft. Business owners should understand the coverage they need and the available policies. Government agencies and clients may not work with you if your business is not insured.
Some of the business insurance policies that are important for the smooth running of business include:
- Professional liability insurance
- General liability insurance
- Workers’ compensation insurance
- Commercial property insurance
Before I wrap up this article on 10 essential startup legal documents every founder should know about, let me answer some of the frequently asked questions.
What should go in a founders’ agreement?
The following clauses should be contained in a founders agreement document:
- Startup’s management structure
- Restrictions on shares acquisition and transfers
- Non-competition of Directors
- How additional shares may be issued and whether existing shareholders will have the right to purchase at the same price to avoid dilution
- How existing shares may or may not be transferred
- How a shareholder can exit
Our founders considered employees?
Founders can be considered employees depending on what the startup upholds as its modus operandi. If a founder passes as an employee, they will be entitled to a cash wage like every other employee.
What are the legal issues in starting up a business?
If you’re thinking of starting a business, there are many legal issues that you will need to address. Some of the most important ones include:
- Obtaining the proper licenses and permits
- Establishing a corporate entity
- Choosing a business structure
- Securing financing
- Protecting your intellectual property rights
- Non-disclosure agreements
- Shares transfers and acquisitions
Conclusion
Hopefully, this article has been informative on the 10 essential startup legal documents every founder should know. While it may be tempting to skip the legal processes, seeking legal assistance early on will save you time, money, and a lot of heartache in the long run.
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