Most people who start a company have an idea about the type of business they want to start. They know what the product is, they estimate its commercial value, and they know what their target audience is.
However, because they don’t have much legal experience, one of the worst mistakes they make is not having legal documents. While it is tempting to dive right into your business, you need to draft a clear business agreement for all your activities. These start-up documents ensure that the business goes on without a hitch. So here are some of the most important legal agreements forms
Articles of Incorporation
One mistake that founders do is registering their business as an LLC. They run their business as a sole proprietorship or a partnership until the business takes off, and they consider the tax implications. The problem is that a sole proprietorship attracts huge income tax bills and unlimited liability on the proprietors. By registering with the IRS as a separate entity, founders can avoid being personally liable, thus avoiding the risk of losing their property. For that purpose, articles of incorporation is an important part of start-up legal documents
Bylaws of the Company
Bylaws are one part of the types of contracts in business that most people tend to ignore. They fail to make it formal, instead choosing to continue the business on rules that keep evolving as time passes by because of the limited workforce. Bylaws are the internal rules of a company, and they determine how the company develops relationships with all its internal elements such as the shareholders and employees.
These rules are important for conflict resolution and responsibility allocation. They also cement rules that would otherwise have been vague and based on a he-said-she-said mode of communication. When a company is expanding, its resources are limited. It can’t afford to miss out on the start-up contracts.
These agreements are extremely important for firms that face technology-assigned risk. These firms deal with IP or novel technology, the process, and the knowledge of which can’t be disclosed for a third party. When companies hire any vendors or when external auditors, lawyers, or any other third parties need to access the information, an NDA helps protect the company’s interests and the founders’ inventions. So, from the moment any third party walks in through the door for any agreement with the company, you should have an NDA that they should sign.
However, it is important to identify what constitutes confidential information and how that information would be disbursed. An NDA is important because it should identify the ownership of the information, the time for which the information would be disbursed, and the time until which the NDA would be valid.
An employee contract is an important business operating agreement. Without employee contracts, there wouldn’t be any written proof of employee responsibilities and rights. Standard employee contracts act as the guideline that employees are expected to adhere to. It also helps in avoiding any future conflicts at work. It also manages the expectations between the employer and the employee. They also help in deciding the compensation that would be offered to the employees.
For example, if you are offering employees some equity, then employee equity agreements would be a great way to determine what part of the ownership the employees get. In general, employee contracts need to mention everything about the employee, such as the hours of work, compensation, duties, targets, performance appraisal, code of conduct, penalties and fines, and termination.
One important business operation agreement, especially when you start getting funding, is a shareholder agreement. The reason this equity agreement template is important is because of the complex rules that surround investors and traders. Market regulatory agencies place stringent governing policies on any company seeking investment from third parties. This includes the part of the shareholding that the founders themselves possess. That means, founders’ equity agreement template is equally important if there is more than one founder.
This is enough if the founders don’t require funding from a third party. But if they do, a start-up investor agreement template will highlight the rights of the shareholders, including the right to transfer shares, the right of first refusal, right to sell or assign the shares, and any liens that come as part of the shares.
What is an operating agreement? Well, when individuals decide to start a business, they need some agreement to determine the type of relationship that would exist between them. This includes the division of roles, assumption of responsibilities, the pay scale for everyone, distribution of equity and shareholding, and the communication channels. An operation agreement also acts as a mechanism for conflict resolution by which the parties can communicate and resolve the differences that they have during the business.
This is important because it identifies that any work the founders do is part of an entity, and the rights belong not to the individual, but to the entity itself. To determine the ownership of the work, operating agreements are drafted, keeping in view the evolving relationships among the founders. The important thing here is that this agreement should be dynamic to account for the changes in the business over time.
IP Assignment Agreement
Most start-ups that deal in technology create some form of intellectual property that drives the business itself. This intellectual property is the key that investors will rely on for providing funds for the company. The value of the IP generated will eventually be the base on which the company itself would be valued. So, when a company develops a business model, it should enter into a technology assignment agreement. This technology could be the IP that the company is trying to protect. This IP assignment agreement safeguards the company for competitors looking to copy the business model and patent trolls
An IP assignment agreement could assign the IP from the individuals who might hand it over to the business or exchange it for cash or equity. In some cases, the agreement might deem that any property generated by any individual after their employment with the company would be company property. In that case, the assignment of the property would be internally done because employees are already part of the company.
Whether a company is large or small, agreements help in protecting the business’ interests. In the long run, agreements bring order and define relationships. This definition is important because a growing business would need to interact with a lot of third parties, and it can’t rely on oral agreements for performance.