Top 8 Legal Documents Every Startup Should Have
Top 8 Legal Documents Every Startup Should Have
Entrepreneurs/founders are known to gamble with calculated risks as a recipe for success. For them, every day is a risk-taking- make or break situation. Startups are a battleground for entrepreneurs to showcase their bubbling skills and risk-taking capabilities to the world. But one should ensure they don't end up in legal soup by missing out on any of the critical legal documents for startups required by every new business. Overall no one wants to get engaged in legal matters.
It has been observed that during the initial days, entrepreneurs make many mistakes. It is interesting to dig the imaginative ideas with the expectation of hope turning into reality.
Welcome back, readers. Today is a new day and a new topic. We have been researching more upcoming blog ideas and collecting information for the past few days. Therefore, we decided to make things easier by delivering legal information to entrepreneurs who don’t know much about legal formalities and are unsure how to begin. Therefore we decided to cover the legal structure (legal documents for startups) that every startup requires and should be done in the initial phase.
Below, we’ve outlined the eight-core legal documents for startups that founders need to implement to avoid costly legal battles down the road.
1. Articles of Incorporation
A common mistake startup founders make failing to put an adequate business structure in place. Putting up only a sole proprietorship can result in high-income tax bills and legal liabilities for which entrepreneurs are directly responsible. In addition, by not filing the Internal Revenue Service (IRS) to form a distinct legal entity for their business, there might be a chance where founders risk losing their savings and, in some exceptional cases, their homes or land.
All options have their pros and cons. For the most general part, startups with multiple shareholders should form a C corporation. On the other hand, businesses that want fewer tax obligations and avoid heftier fees during early growth should consider creating a limited liability company (LLC).
2. Intellectual Property Assignment Agreement
Many startups are formed on intellectual property and high hopes. For example, the intellectual property might be software copyright or a pending patent for a new device. The company may not own intellectual property without an intellectual property assignment agreement.
For example, suppose one of your founders created software before your company was established. In that case, they own the copyright to that software unless there is a written assignment agreement transferring the copyright to your startup.
The same is true of independent contractors who create intellectual property for you. This can cause significant problems if the entrepreneur withdraws from the company. The contractor refuses to assign the copyright, or outside investors ask for evidence that the startup owns its intellectual property.
Entrepreneurs, employees, and independent contractors should sign intellectual property assignment agreements at the outset to guarantee that your startup owns its intellectual property assets and prevents any challenges later.
3. Nondisclosure Agreements
A nondisclosure agreement, also known as an “NDA," protects your startup's confidential and private information. An NDA explains what type of information or details is confidential and describes how the data can be used or disclosed to others. NDAs are critical to protecting any company information you don't want to be released to the public, including product information, financial data, and sales and marketing plans.
NDAs must be only signed by those who have permission to access confidential information, including employees, independent contractors, vendors, potential investors, and many others. A nondisclosure agreement protects all your crucial information against competitors who might steal or copy your product or use the information in their product to gain a competitive edge.
4. All Employee Contracts
Generally, in most states, employees are “at-will" and can leave their job at any time unless an employment contract (Contractual position) obligates them. However, employees in a startup who are critical to the company's early success may want to put employment contracts in place to ensure that they have the company for a specified amount mentioned in the agreement.
Employees might need to sign other contracts that include NDAs, intellectual property assignments, and non-compete agreements.
If an employee will be reimbursed with stock in the startup, an agreement specifies how that compensation will be calculated and paid.
If you use independent contractors (freelancers), have them sign a separate contractual agreement specifying the relationship's terms.
Starting a new business is not easy; you spend hours of hard work, and it can seem like you don't get enough time left to get things done by the end of the day.
But by managing time, taking out a few hours, and paying attention to your legal startup documents as you establish your business, you can protect your investment and prevent a lot of upcoming troubles down the road.
Every startup wants a particular set of working guidelines or ideas that govern that area. Bylaws should establish the company’s internal rules, like settling disputes, selecting leadership, and determining shareholders’ rights and powers. Bylaws can embrace, however, usually are not restricted to voting rights to pick management, the election of board members, or taking approvals and different inside functions of the organization.
6. Operating Agreement (Founders Agreement)
All co-founders should sign a comprehensive operating agreement to avoid conflict among the founding parties. The agreement should define the founders' relationship, including the expectation that all work will belong to some entity present and in the future- outline a necessary communication and conflict-resolution clause to help prevent disputes.
7. Shareholder agreements
Once your startup is ready to take one on one with private investments, a Shareholder's Agreement needs to be put in place to determine these shareholders' rights and their ability to exercise them. Like spousal support after remarriage, these agreements are significant as they define the relationship between a company’s shareholders and are invaluable if a co-founder decides to leave.