Startup founders are eager to get their idea to fruition, but they also make a lot mistakes along the way, including failing to use the right legal documents. Founders want to dig into their ideas, create and realize their company’s vision while worrying about the legal bases later on after the company makes money.
But a failure to have core legal documents from the get-goputs a startup in a position to suffer costly legal battles.
Contracts alone, just in the United States, makeup around 60% of the 20 million civil lawsuits per year. Protecting your startup starts with the following fundamental legal documents:
1. IP Assignment Agreement
Intellectual property assignment agreements are needed for a startup that wants to attract investors to help fund the company. These agreements protect startup owners from:
• Assign IP to a startup that was created prior to the business formation.
• Assign IP to the company that was created by employees.
Technology startups especially need to consider their intellectual property assignments to curb claims from patent trolls and other businesses trying to copy their business model.
2. Non-Disclosure Agreement
Non-disclosure agreements (or confidentiality agreements) need to be available before discussing your business with any outside party. Investors and prospective employees must have a non-disclosure agreement waiting for them to sign before any information is exchanged.
An NDA will protect:
• Business models
• Intellectual property
If an NDA is not signed, the information you disclose can be discussed openly without any threat of recourse. The terms of the agreement need to be analyzed by an attorney to include:
• Definition of confidential information
• Time that information is disclosed
• Time confidentiality is maintained
• Exception on restrictions
• Penalty clauses
A non-disclosure agreement is one of the most important documents a startup can have ready and waiting for potential investors, business meetings and potential employees.
3. Articles of Incorporation, Bylaws and Operating Agreement – Three legal documents make up the foundation of a startup:
1. Articles of Incorporation
3. Operating Agreement
Articles of Incorporation are the initial documents that form a business. Startups need the protection provided to business entities. A sole proprietorship risks higher taxes and full liability for business debts.
In extreme cases, sole proprietors can lose their homes and personal savings.
Discuss the benefits of a specific legal entity with a lawyer (LLCs and C Corporations are most common).
Bylaws are the next document that a business will want to create. These documents help a startup avoid internal conflicts that may arise from:
• Voting rights
• Shareholder power
• Election of leadership
Voting power is a vital portion of the bylaws and will protect a business from entering into debt or electing new board members by providing too much power to one owner or shareholder.
Operating agreements are the final document that is a must-have at the time of incorporating. These documents, also called Founder’s Agreements, help stave off conflict that occurs between founding parties. This document should include:
• Work expectations of all founders
• Basic communication outlines
• Conflict-resolution clauses
• Relationship of all founders
• Member financial interest
• Non-compete clauses
• Fiduciary duties
• Dissolution requirements
• Tax issue conditions
Proper record keeping, alternative dispute resolution guidelines and the right legal documents allow startups to grow and take proper steps to profitability without unnecessary legal risks being taken.
Alex is a guest post writer from Smartguestposts. He has years of experience and has been highly praised for the overall quality of his content. Having written on a wide range of topics, Alex takes great pride in his craft. He posseses a wealth of knowledge on a variety of subjects, which has enabled him to become such a skilled writer
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