Overcoming Common Obstacles For Start-Ups
There are several key legal issues that I have seen regularly become obstacles for entrepreneurs and their lawyers. Here, I discuss the main considerations for start-ups to help them succeed.
In some cases, they will simply be a hassle to clean up in a fundraising round or an exit. However, they often have many financial implications for the start-up, and in the worst case, can seriously damage the value of the start-up. The issues such as the protection of intellectual property and employment are normally the ones that crop up first. These are often overlooked by the founders that are busy working on their start-up ideas and trying to figure how to raise their first capital. These legal issues can be dealt with by ensuring that the relevant legal agreements are in place at the outset.
The Non-Disclosure Agreement
An agreement between the start-up and anyone not currently otherwise engaged by the start-up (for example, an advisor, consultant or employee) requires them not to circulate any confidential information they might receive. In the event you discuss your idea with potential advisors or future employees you might ask them to sign a non-disclosure agreement (NDA).
An NDA is a contractual commitment that the person receiving confidential information about your start-up during discussions to not disclose that information to anyone else. In practice, NDAs are for the most part unenforceable. Many potential advisors or investors will not sign them for various reasons. Usually, you have much more to gain by openly sharing your idea with people than trying to protect it.
The Founders Pledge
The first stage of a start-up is normally the idea stage.
There might be one or two founders working on an idea and everybody is happy. But what happens if things go wrong and there is a dispute between the founders? How do you ensure protection for the founders and the start-up?
This can be regulated by making sure that each founder enters into a very basic agreement that called a Founders Pledge. The terms of the agreement set out the founder’s duties as directors of the start-up, summarising reasons for the potential termination of founders, what to do in the event of a founder parting ways with the start-up as well as other clauses protecting the start-up’s intellectual property and interests.
The Founders Service Agreement
The next stage in the start-up is normally when there is some sort of Minimum Viable Product (MVP) and the start-up is looking to raise some funding. The founders are now starting to pay themselves a salary the agreement is a cross between the founders’ pledge and an employment agreement. In addition to the basic terms in the Founders Pledge, you would find further terms in the employment agreement – such as salary, holiday entitlement and other absences.
The IP Assignment Agreement
The IP Assignment Agreement ensures that everyone who has worked on the product or idea without a formal contract assigns their rights to the product development to the start-up. Therefore, any work that was produced by an individual before the incorporation of the start-up belongs to the start-up, not the individual. This is important because any disputes that relate to intellectual property created can scare off any potential investor.
Contracts of Employment and Terms and Conditions
As you start to grow, it is a legal requirement that everyone who is working as an employee has a contract of employment, or terms and condition in place from day one of their employment.
The additional benefits of having these documents in place include:
1. They clearly define roles, responsibilities, and obligations, helping protect your business from potential disputes or Tribunal action.
2. HMRC is cracking down on “disguised employees” or other payroll anomalies which could incur you financial penalties.
Contracts of Employment designed for start-ups cover everything from salary to holiday entitlement and job roles and responsibilities. However, an important additional feature for start-ups is the ability to assign share options to your employees as part of their contract. Often early-stage start-ups don’t have a huge budget for salaries, so part of your employee’s remuneration and ensuring that the start-up attracts the best talent can come in the form of share options.
The Advisor Agreement
For start-ups having the right people around you and advice is crucial. Advisors can open doors and make valuable introductions. When you want to work more formally with advisors it’s important to have an agreement in place. There are various ways you can remunerate an advisor. One possibility is to offer shares, cash or a combination of the two but it is usually shares. The agreement should set out what your expectations are of the advisor in terms of their role, for example, to help with networking and introductions as well as their obligations to you, such as an agreement to treat any information they acquire in the role as confidential. It also covers what to do in the event they leave or are terminated from post and (if they are remunerated with equity) their vesting for their equity.
The Consultancy Agreements
Is an agreement between your start-up and anyone working for it as a contractor and not a full-time start-up employee. Consultancy agreements are used to engage people (contractors) working on your start-up who are not part of the executive team, long term advisors or employees.
And finally, make sure that you pick the right lawyer.
An experienced lawyer who understands VC financing is invaluable. VC’s make investments all the time while entrepreneurs raise money occasionally. A bad lawyer or one inexperienced in VC financing can cause you a lot of problems. The inexperienced lawyer will focus on the wrong issues, fight hard on things that don’t matter and run up the fees on both sides. The last thing you want to do is use the lawyer that acted for you when you bought your last family home.
