Technology entrepreneurs are typically driven by a vision. They have a big idea, an appetite for hard work, and no time to waste. Accordingly, many ambitious startup founders view questions about the legal framework of their enterprise as expensive and time-consuming distractions from the main race. But without putting the proper legal protections in place, you’re risking years of energy, effort, and perhaps most importantly, your financial reward.
This article provides a high-level overview of some of the basic but important legal documents your startup may need to get off to a running start.
A shareholders’ agreement is a legally binding contract between shareholders (commonly between the founder/s and early-stage investors) that addresses fundamental governance questions about how major decisions are made, how the business is operated day to day, how future capital will be raised, how disputes will be resolved, and how investors will eventually exit the company. For many businesses, it’s one of the most important documents you will ever sign.
The most basic provisions of a shareholders’ agreement set out details of business decision-making, identify directors, their voting rights and duties, and how they are appointed; the frequency of board and general meetings; and any provisions for dividends. They can also provide for pre-emptive rights when new investors join the company, so that founding investors can protect certain rights despite dilution of their holdings. In the event of one or more owners seeking to exit the business, the agreement should cover procedures for the sale and disposal of interests including tag-along and drag-along rights to govern procedures in the case of a third-party purchase offer.
A shareholders’ agreement can also clarify the management of intellectual property, insurance and loan provisions, specific expectations or contributions required of particular shareholders, and any restrictions that will apply to selling shares and raising more equity capital.
A lean and mean startup is fine in theory, but poor record-keeping will come to haunt you when a potential investor or future owner comes looking for specific documents as part of a due diligence investigation or other exit.
Good record-keeping habits – including properly and accurately reflecting written records of board and shareholder resolutions (including founding and new share issues), keeping registers of members and directors up to date and ensuring ASIC filings are made on-time and accurately – are not difficult but are often overlooked in the start-up phase of a new business where founders are time-poor and focused on the development of their vision.
There are a number of resources available to assist founders of start-ups manage their corporate record keeping obligations with limited energy and cost.
Employee and contractor relations
Hiring the right people is crucial to the sustainable growth of your startup business. But without proper documentation and tax advice, some employee arrangements can become expensive mistakes for employer and employee alike.
Your new startup should consider the following:
- An employee option plan. These plans set out the terms of hiring key people via ‘sweat equity’ or by deferred payment in lieu of shares in your company. Proper tax advice is essential for employee option plans.
- An employee contract that protects your business. All employees, but in particular those employees who will have access to confidential and proprietary information (for example, the source code for software developers), should sign contracts with provisions that adequately protect the company’s primary assets, its intellectual property.
- An employee handbook. A rulebook for your startup team, clearly describing the policies and procedures by which the company will run.
Non-disclosure agreements (NDAs)
In order to build trusted relationships with investors and business partners, confidential information must eventually be shared. Having a standard non-disclosure agreement available and ready to dispatch when required will not only help your startup be prepared when a business opportunity arises, but it will also reflect well on your professionalism.
Terms and conditions (T&Cs)
With data collection an intrinsic aspect of many online businesses, privacy statements are now an expected element of any commercial website. If you’re selling goods or services and collect information, you must ask for consent to do so.
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