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10 Agreements Startups Need Before Incorporation In India

Published on 16 Jan 2018 by Tushar

The biggest mistake an entrepreneur can make is not creating a strong legal backbone. This is a cardinal sin no matter how good your idea is or how much investment you might be able to raise.

Here is a quick 10 point guide on what agreements must be in place preferably before incorporating a rough business idea to a formal company or partnership structure.

1. Co-Founders Agreement

Always ensure you have a co-founders agreement in place. Even if you and your co-founders are best buddies you need to have a cofounders agreement if you want to be taken seriously. Also, no investor will entertain you if you don’t have one. Remember, a business is a business, do not mix it up with friendship.

Legistify drafts thousands of customised legal agreements over a year through its network of documentation expert lawyers across the nation. Here is a quick guide on all clauses that must be incorporated in the agreement-

  1. Firstly the ownership percentage must be clear.
  2. Continued Participation and role of each Partner- Addressing the issue whether this ownership percentage is based on continued participation, and if so then clear terms specifying what work is expected.
  3. Addressing Partner’s exit- A partner leaving is a common sight in startups. It must be clear whether the company or the other founders have the right to buy back the leaving founder’s shares and at what price.
  4. Salaries- If salaries are to be taken from the startup then the same must be addressed. It is also desirable to make this as detailed as possible and address how the salaries would increment or change over time with different circumstances.
  5. Decision-making Mechanism- To settle the most crucial disputes there has to be an agreed system on voting. This can be done by majority vote, unanimous vote, what are the decisions which can be made solely by the CEO.
  6. Removal of the Partner- The circumstances where a partner will be removed must be crystallized. The process must also be crystallized whether it would be automatic termination, a Board decision or otherwise.
  7. Clarity on the assets or cash which each founder has contributed to the business.
  8. Sale of business- in case of exiting the market or selling at the right value pre-decided terms must be settled.
  9. Addressing Under Performance- a resolution mechanism on how to deal with a drop in expected work performance.
  10. Clarity on What the overall goal and objectives of the business are.

2. IP Assignment - Registration of all Intellectual Property before going Public is crucial

The founders of a business have various intellectual property assets which need to be protected actively from infringement. During the formation of a new company, a best practice is to assign all relevant intellectual property to the company.

Preferably assets like the name of the company, any trademark or mark assigned to the company, special products or designs or codes etc which the company deals in, specialized packaging etc should ideally be under the process of registering as Intellectual property before the formation of the company.

When all intellectual properties of the business are registered the same is created into a portfolio. This IP Portfolio is in fact crucial in raising investment.

It is important to assign to the company all technology related intellectual property created before forming the company. In some cases, the developers would want to keep control of individual IP ownership rights in the Patent, Trademark or Copyright of the business. Nevertheless, it is desirable to buy all rights to the Intellectual properties created for equity or cash.

It is advisable to take ownership of all the products/ content/ work done by employees after the company’s formation. An agreement must be entered into by the employers and employees which would be a mix of a confidentiality agreement and an IP Assignment agreement giving the company all rights of use of all such works.

3.Employment Offer Letters

Ideally, an employment offer letter must incorporate the following-

  1. Detailed description of responsibilities.
  2. Salary and other Benefits.
  3. Termination clause- the employer must specify clearly that the employment is “at will". The contract should state that the employer can terminate employment at any time with a due notice as required by the law.
  4. Confidentiality clause- that the employee is required to sign a Confidentiality and Invention Assignment Agreement (discussed below)
  5. Potential Amendments- any changes to the contract can only be done in writing signed by the employer and employee.
  6. Dispute resolution clause- preferably this should state that all disputes between employer and employee will be settled confidentially via arbitration.

4. Non Disclosure Agreement

Startups sometimes overlook the benefits of a well drafted Confidentiality Agreement to keep a check on their employees, vendors, third parties.
Employees are propriety to the company’s confidential information. Alternatively, the employees sometimes come up with ideas, codes, documentation etc that must be kept confidential in circumstances where the employee leaves the company or even otherwise as they would lawfully be the company’s intellectual property.

The ideal time to enter into a Non-Disclosure Agreement (NDA) is before sitting down on the negotiation table with a potential employee or third party before making any disclosures about the business.  

NDA must incorporate clearly –

  1. Confidential obligations.
  2. Information that is excluded from the confidentiality (such as information already in the public domain),
  3. The time period for how long the confidentiality obligation lasts,
  4. Most importantly the NDA should state clearly the right of the disclosing party to seek injunctive relief to stop the other side from disclosing the information.

5. Shareholders Agreement

Share Subscription And Shareholders' Agreement does exactly what the name suggests, probably it will be the most important contract you will enter into amongst the initial team of the start-up, after all its about ownership. You surely don’t want it to be legally challenged in courts and cause a tussle between stakeholders. 

Agreements governing the relationship with Clients and Third Parties

6. Commercial Leases

It is advisable to get done with any lease/ rental agreements out of the way. Co-working spaces are a big hit with startups these days as they provide for a functional environment in a cost effective manner. These agreements would come in handy for future credibility and validity as they usually contain the address, amount of rent, terms and conditions of lease, termination or expiry of the lease agreement.

7. Client Agreement

A Client agreement is relevant for businesses providing services. These are templatised formats of agreements which clarify the terms of services, nature of service being provided, the date of commencement and ending of services and most importantly contains disclaimers regarding the services.

8. Sale Agreement

Whereas the Sale agreement is normally used in case of companies selling goods. It must define the dates, prices, use and other details. These contracts also denote the refund policy of the company, if any. All the terms and conditions are clearly under these contracts to avoid future problems.

9. Independent Contractor Agreements

Startups work with various free lancers, from video editors, social media, digital marketing freelancers etc. It is important to have a set contract with pre-defined terms drafted well. This same agreement could be used with minor tweaks for different types of third parties.

10. Website Terms and Conditions Agreement

A Terms and Conditions agreement is a legally binding contract between the website owner and users. This agreement sets the rules that users must duly agree.The Terms of use of a website, specifically limits the liability of a website owner by making the user subject to certain limitations. A user becomes bound by such limitations by using the website. The limitations are descriptive in nature and even clearly explains the consequences that can be faced by the user in case of any violation as such.

Legistify connects you with the best lawyers in India and top Chartered Accountants in India with simple telephonic conversation or email. Call us at 846-883-3013 or send us an email at [email protected] to get started.

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