Out of all the risks that entrepreneurs take, perhaps the biggest is failing to establish a solid legal foundation for their startup. Legal documents for startups include protecting a startup’s inventions, or the rules which define each leader’s position in the company. Without them, the startup is no more reputable or organized than a scam.
Don’t make that same mistake. Start with the most important legal documents for the formation of your business. You may just avoid several headaches down the line.
Here are a few legal documents to get you started.
Articles of Incorporation
One of the first legal documents a startup has to concern itself with is the articles of incorporation. Although entrepreneurs have the option of foregoing incorporation in favor of sole proprietorship, this usually results in some major tax consequences later on. Incorporation is also ideal if you plan on attracting outside funding in the future.
Each state has their own unique laws regarding incorporation. For example, in Illinois, incorporation must involve a registered agent and include certain abbreviations.
Intellectual Property (IP) Assignment Agreement
Have you ever seen Shark Tank? The most commonly asked questions on the popular startup funding show almost always have to do with intellectual property. These IPs typically include software licenses, invention patents, secret recipes, and other proprietary knowledge. IP assignment agreements ensure the company has the sole rights over the intellectual property.
For instance, you may hire a graphic designer to create your brand’s first logo and other branding material. But without an IP assignment agreement, they may be able to walk away with the rights to that material- even if you paid them! Make sure any technology, design, or information unique to your brand has a corresponding IP assignment agreement to avoid any future disputes.
Also known as an operating agreement, this document prevents any sort of disagreement between the founding parties and co-founders. This document sets out to define the basic roles, rights, and responsibilities that each of the founders have in relation to the company.
Starting out, agreements may be informal and spoken, but without having them in writing, conflict can quickly arise. Arguments may break out, but without any evidence, it essentially becomes one person’s word over another. Protect everyone involved by hashing out the initial founder’s agreement early on.
Similar to the Founder’s Agreement, bylaws dictate the business’s internal rules, leadership roles, and shareholders’ rights. Bylaws also clarify the voting requirements for introducing new laws, electing new board members, or raising topics for discussion.
Nondisclosure Agreements (NDA)
An NDA is a contract signed by individuals protecting confidential information in your startup. For example, startups may ask contractors to sign NDAs when they are shown an unreleased or unannounced product, or when a vendor is asked to review a marketing plan for the following year.
NDAs typically define:
- The information considered confidential or not for disclosure
- The manner in which confidential information is meant to be handled
- The owner of the information
- The time period for confidentiality
Employee contracts and offer letters
Companies that plan on hiring new employees need to have clear documentation on the nature of the business relationship. Employment contracts and offer letters clearly communicate the following:
- Responsibilities (from daily tasks and monthly goals)
- Ownership of IP (graphics/ written content)
- Best practices/ expectations (how one is supposed to conduct their job)
- Company policies (working hours, dress code, office conduct)
Shareholder agreements define how among shareholders how a company should be operated as well as shareholder rights and duties. It ensures shareholders are protected.
Creating a startup and seeing it to fruition can be one of the most rewarding feelings. But far too often, entrepreneurs and founders forget to take basic but important steps in protecting their future. As a result, competitors manage to steal proprietary software, founders bicker over profits, and new hires may cost the business a fortune.
Take the long route and seek professional counsel. It may seem tedious, and even overwhelming at first. That’s natural. But by establishing these six legal documents at the onset of your startup, you can safeguard your business from years worth of financial and legal chaos. In fact, these initial steps can make all the difference between an amateur startup and a long-lasting business.