For many startups in the UK, risk and creativity, as well as innovation, often block the path to success. One of the biggest risks that entrepreneurs can make when ensuring that their product moves from the idea stage to market is the failure to have critical legal documents in place.
In order to cement relationships between founders, team members and investors, venture capitalists might well view a startup as a greater risk were it not to have the relevant legal infrastructure in place.
Indeed, by having the correct legal documentation in place, it ensures that companies have a solid foundation to build from. However, it’s not uncommon for startups, particularly those whose budgets are limited, to spend their hard-earned elsewhere.
Legal counsel and appropriate documentation isn’t cheap, and at the outset – for many businesses at least – the priorities are elsewhere.
It’s vital to protect one’s interests at the beginning, and in order to help do so, there are seven crucial documents that every UK startup and scale-up business should have.
What Legal Documents and Contracts Do Startups Need to Have?
1. Startup Founders’ Agreement
What is a Founders’ Agreement?
Essentially, it is a legally binding contract which will serve a purpose of summarising the ownership, investment and equity between the founders of the company.
It’s important, at the outset, that there is complete transparency among the founders which will help to prevent expensive legal fees further down the line. The document will set the standard from which to move forward, and must include items such as ownership rights and operational responsibilities.
Ensuring a clear understanding of the basic components of the agreement will benefit any organisation immeasurably. The Founders’ Agreement should, where possible, answer questions such as:
- Who is involved?
- What is the value of their ownership?
- What are owners tasked to do?
- How will this agreement affect them?
- What purpose does the startup serve?
- What solutions does it provide?
Once the Founders’ Agreement is in place, it’s also worth casting a beady eye over trademarking laws.
Utilising a trademark can help reinforce the brand and position it, however, one should also bear in mind that any company with a similar sounding name can object. People who wouldn’t have otherwise been interested in will start paying attention, and that may cause certain issues.
2. Nondisclosure Agreement
A Nondisclosure Agreement is most often referred to simply as an NDA.
Once signed, any information contained within the document must remain private between those who have signed it.
It acts as a preventative measure against company employees, their contractors and even investors from sharing information.
Information could be classed as, but not limited to; company data (particularly of the more sensitive type), client information, company strategy, new product data and also trade secrets.
Clearly therefore, and NDA is one of the most vital pieces of the jigsaw.
3. Articles of Incorporation
Documents required to incorporate a company In the UK, there are various documents that are required to incorporate a company. They include:
The Articles of Incorporation are essentially a legal statement(s) which shows the names of the company’s founding members, and their intention to incorporate the company.
Submitted to Companies House in London, the Articles of Incorporation should also outline the rules by which the company must agree to adhere to and operate by.
A Shareholder Agreement is there for the benefit of all who have a vested interest in the company. Ideally, drafting and agreeing a Shareholder Agreement should be one of the first tasks the founders undertake.
That’s because the document outlines a shareholders’ right to transfer shares, right of first refusal, redemption upon death or disability and shareholders’ power to manage and run the startup.
It provides a specially tailored procedural framework — obligations, protections, privileges, rights — for and by shareholders – and it governs the relationship between founders and shareholders, outlining ownership, investment, and equity.
Shareholder disputes, transfer of shares, and exit strategies are just three things that need to be borne in mind at the outset, and this particular document will cover all bases.
5. Employee Contracts
Very simply, the Employee Contract is a legal document between the employer and employee. It is legally binding and must define in clear and simple terms the employees rights, responsibilities and duties.
Employees in the UK are legally entitled to the same, which will include the terms and conditions of their employment with the company.
For example; Terms of employment (e.g., compensation, role responsibilities, working hours and grounds for termination), reporting structure, IP ownership of work, expectations, required commitments, share vesting and company policies (e.g., holidays, paid time off structure, dress code).
Ideally, employee contracts should be signed and agreed before an employee starts working for the company, albeit there is a facility for companies to have a two month maximum grace period in order to fine tune this document.
Startup founders must ensure that their offer letters and Employee Contracts are clear and mostly free of legal jargon. New employees must be able to easily understand the terms and, therefore, what’s expected of them as an employee.
How are shareholder disputes resolved? How do board members vote?
Having bylaws in place protects the startup’s long term organisational integrity from an unpredictable and turbulent future.
Bylaws are administrative and managerial rules.
These guide the operational composition of the company, owners, shareholders, and employees.
7. Intellectual Property (IP) Assignment Agreement
When forming a new company, it’s always best practice to assign all relevant intellectual property (IP) to the company, and startup founders should have complete ownership of all IP assets in writing
Companies that try to copy the business model of another are foiled if they are up against one that has already assigned all of its relevant IP.
An IP assignment agreement could be the key legal document that determines whether your startup can attract the investments it needs in order to grow, which is especially true for technology companies.
It’s often the value of your IP portfolio that investors and venture capital firms are evaluating.