10 Legal Documents Every Startup Should Have
- Bylaws / Operating Agreement
A company’s Bylaws (in the case of a corporation) or Operating Agreement (in the case of an LLC) provide the legal backbone for how it operates. If your company does not have bylaws in place, state statutes will control how the company is run. However, these default rules might not be the best fit for your company, so it is much better to strategically think through how you would like your company to be run.
For example, if there is a major disagreement among the owners that “deadlocks” the company from being able to do anything, generally one of the only remedies under state statutes is that an owner can file a lawsuit asking the court to wind up and dissolve the company. This is usually a lose-lose for everyone, especially if the company was doing well prior to the deadlock. The owners could avoid this scenario by having certain dispute resolution provisions in the bylaws, or by having a limited, advisory-only member of the company who effectively acts as a tie-breaker, the process for which would be set forth in the bylaws.
After establishing a well-thought out corporate structure and executing governance documents, every company should make sure that they have good insurance coverage. This may not come cheap, but it’s an important investment for any business to make.
Beyond a general commercial liability policy, insurance can cover anything from cyber liability to director/officer liability to life insurance for key founders. Also, if you are selling any kind of product to the public, consulting with an attorney who specializes in products liability is advised, as they will be able to assist you in mapping out this additional exposure to risk and preparing any contracts or disclaimers to include with the sale of your product.
- Shareholders’ Agreement
This agreement, which also may be called a “Founders’ Agreement” or “Buy-Sell Agreement”, can help you govern the relationship between the owners of your company. You and your business partners may be on the best of terms now, but running a company might put a strain on your relationship sooner than you think. Interpersonal conflict between founders is one of the most common and predictable reasons for why companies fail. Thus, a shareholders’ agreement goes a long way to protect your investment in the new business.
This type of agreement should contain vital information such as who can be a shareholder or serve on the board of directors, what happens in the case of a shareholder’s death or impairment, or what happens when a shareholder files for bankruptcy, resigns, retires or is fired. It should also outline how much shares of stock are worth and who will be required to purchase the shares of the owner who is leaving.
- Non-Disclosure Agreement (NDA)
NDAs protect the confidential information of your business. They are used when one or both parties in a relationship wish to disclose confidential information, but want to ensure that the person or organization who receives it does not disclose it to anyone without consent. For example, if you are looking for a manufacturer to produce your company’s new widget on a mass scale, you should probably have each potential manufacturer you interview sign an NDA so that they can’t turn around and start making your widget anyways.
Keep in mind, NDAs are worthless unless they are actually signed by the party against whom you wish to enforce it. No matter what verbal promises were made before or after information was disclosed, it is advised you get your NDA in writing and signed by both parties before any confidential information is shared. This way, both parties clearly know their duties and privileges as they are receiving business information from the other.
- Intellectual Property Agreement
This document is mandatory if you wish to acquire, sell or license intellectual property (e.g. copyrights, trademarks, patents).
If you are giving or receiving all the rights to a certain piece of intellectual property, that is called an “assignment”. If you are giving or receiving only a few rights related to the intellectual property (for example, the right to print and distribute someone’s copyrighted book), that is a “license.”
Whether you are just starting out or a well-established business, intellectual property or “IP” is often a significant piece of your business’s value. An IP agreement protects this value.
A good IP agreement should be comprehensive, covering the financial compensation, date of the assignment/license, the rights and obligations of the Assignor and Assignee and timelines for payment, representations and warranties, indemnities, and more.
Currently, data privacy laws are a patchwork of various state laws and federal regulations. Some industries, such as education and finance, are also subject to special rules. Some states, such as California, have enacted laws for any business that targets customers in that state. If you have concerns about whether you are following the law in this complex area, consulting with an attorney is strongly advised.
- Terms & Conditions
This item is essential if you conduct any business online. Your website’s terms and conditions regulate the online transactions where you sell your products or services to clients.
Well drafted website “Terms and Conditions of Use” will deal with issues such as returns and refunds, consumer guarantees, deliveries, disclaimers and competitors. They will also have the effect of limiting liability for any information and material that may be on your site in relation to third party information or content that is included on your site.
Additionally, it should lay down the rules for people visiting the website as well as explaining that any intellectual property on the website is protected. Your website’s terms and conditions should be easy to read and accessible before a transaction takes place.
- Founders’ Assignment of Intellectual Property
Each and every person who works in any manner for the company, including the founders, should execute an agreement assigning their creations to the company. A founder’s IP contributions could be anything from patents, software, logos and marketing materials, customer data, and more.
Especially during the startup phase of a company, almost all of the value of the venture will be tied up in the IP, so if the company cannot prove it actually has legal title to these assets, the company is essentially worthless.
- Employee Contracts or Offer Letters
Having a easy to understand contract or offer and acceptance letter with employees is essential for setting forth expectations and ensuring the employee is tied into the team. Topics that could be covered in an employee contract or offer letter include who the employee reports to, who will own the employee’s work product, basic expectations, required commitments, share vesting and all other “rules” the employee must abide by. This prevents misunderstandings and thus can go a long way to protect the company from HR-related disputes.
- Liability Release Forms
Startup companies tend to have a variety of fun work events that may involve risk. For example, maybe your company has an annual dodgeball tournament against an important vendor or maybe you want to organize a company “hiking day” for bonding and team-building. If so, you should have all employees sign a liability release form so that your company doesn’t become liable for an unexpected accident.